Transferring more tax devolution to states at the beginning of the year is a prudent move
Transferring more tax devolution to states at the beginning of the year is a prudent move
Centre’s move to transfer a major chunk of tax transfer arrears to states Wednesday is a once-in-a-lifetime move that will not only spur fresh capital expenditure on the ground, but will also temporarily calm a new round of unease between the Center and the states. With a higher than anticipated jump in tax receipts, the finance ministry has increased the states’ monthly share in the divisible pool of taxes from about ₹48,000 crore in the first quarter of 2022-23 to ₹58,332.86 crore for August. And the surplus cash balance with the treasury has made room for states to transfer two months’ arrears in one go, which translates into a significant one-time amount of around ₹1.17 lakh crore. While the government made similar transfers to states last year by aggregating and clearing two-month dues, the context is dramatically different for states in this fiscal year. For starters, they no longer have the fallback option of assured revenue from GST compensation over the five years till June 30, 2022. Even as for the GST arrears accrued this year, the Center pushed the release of around Rs 87,000 crore to the states for April. And May, though there was only ₹25,000 crore in the GST Compensation Cess account at that time, dipping into its own exchequer. With Rs 35,000 crore of GST outstanding for June, the total reimbursement for states from GST will be around ₹1.22 lakh crore, less than half of ₹2.5 lakh crore in 2021-22.
States are facing another uncertainty which has led to highly tentative treatment of their exchequer in the recent state development loans auctions – change in their net lending norms. While the Center had set the borrowing limit of states at 3.5% of their Gross State Domestic Product for the year, this limit is to be exceeded as per the off-budget loans raised by the states from 2020-21 onwards. Early indications that all such off-the-book loans will be cut from this year’s ceiling also had a cooling effect, not least because the lack of clear data on such borrowing limits has led to the actual It becomes difficult to estimate the limit. The center will determine for each state. The finance ministry has also relaxed on this front, making it clear that only their off-budget loans for 2021-22 will be adjusted against the ceiling and that too in a staggered manner between this year and 2025-26. The norms for interest-free loans of ₹1 lakh crore given to states for discretionary projects this year may also be reviewed to help it gain greater traction with state governments. Taken together, these steps should help states, which expressed concerns about declining revenues at the recent NITI Aayog Governing Council meeting, backed the effort to revive the economy with a capex spree. The friction points between the Center and the states will fluctuate with intensity, but the rising economic wave will ease the barriers for both.