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Informist, Monday, Nov. 18, 2024

 

--Source:Centre may ask 16th fin panel to cut states' tax share, hike grants

--Source: Centre may ask 16th fin panel to cut states' tax share below 30%

--CONTEXT: Currently, states get 41% of the divisible pool of taxes

--Source: Centre preparing proposals for 16th fin panel, may present by Jun

 

By Krity Ambey and Sagar Sen

 

NEW DELHI – The Centre is likely to soon present a memorandum of proposals to the 16th Finance Commission in which it may seek a reduction in the tax devolution ratio for states to below 30% from the current 41%, and may instead push for the transfer of more funds to states through grants-in-aid, a finance ministry official said.

 

"The current level (of 41%) is pretty high. There is a need to recalibrate and bring it down," the official told Informist on the condition of anonymity. "In fact, it has been high after the 13th Finance Commission period."

 

The 14th Finance Commission, whose recommendations were applicable from 2015-16 (Apr-Mar), sharply increased states' share in the divisble pool of taxes of the government to 42.0% from the previous 32.0% due to the abolition of the Planning Commission and an end to plan grants. This was then reduced to 41.0% by the 15th Finance Commission after Jammu and Kashmir was split into two Union Territories in 2019.

 

The recommendations of the 15th Finance Commission apply till Mar. 31, 2026. The 16th Finance Commission, led by former NITI Aayog vice chairman Arvind Panagariya, is to submit its report for the five years starting FY27 by October next year. In recent meetings with state government officials, the Panagariya-led commission has been asked to increase the tax devolution ratio to as high as 60% amid discontent arising from the Centre's burgeoning collections from cesses and surcharges which are not part of the pool of funds that are to be shared with states.

 

"States will, of course, demand an unrealistically high number," the aforementioned finance ministry official said, arguing that grants-in-aid can be more helpful in meeting the needs of states and accelerating their development.

 

Besides revenue deficit and state-specific grants, finance commissions recommend social sector grants to improve states' education and health services, and grants related to local bodies for administrative and governance reforms, as well as grants tied to infrastructure maintenance. The FY25 Union Budget pegged total transfers to states for the fiscal year at INR 23.49 trillion, with tax devolution at INR 12.47 trillion, Finance Commission grants at INR 1.32 trillion, and transfers for centrally-sponsored schemes at INR 4.80 trillion, among others.

 

The Centre is currently studying the impact of the recommendations of previous finance commissions. It will accordingly finalise the memorandum and present it to the 16th Finance Commission by June, the official said.

 

STATE-WISE ALLOCATION

Like vertical devolution, the government also prefers the pre-14th Finance Commission era when it comes to horizontal devolution, which refers to the distribution of funds among states based on certain criteria that are assigned specific weights. According to the official quoted above, the recommendations of the 13th Finance Commission were "more progressive and loaded with parameters related to fiscal discipline."

 

"We would want horizontal devolution to be more performance-oriented with respect to the fiscal health of the states... somewhat similar to how it was under the 13th (Finance Commission)," the official said.

 

The 13th Finance Commission had assigned a weight of 17.5% to fiscal discipline when it came to divvying up funds among states. This was removed altogether by the 14th and 15th finance commissions, with the latter giving a 2.5% weightage to "tax efforts".

 

Apart from tax efforts, factors that decide how money is divided among states as per the 15th Finance Commission's recommendations are: income distance (45.0% weight), population (15.0%), area (15.0%), demographic change (12.5%), and forest cover (10.0%). Finance commissions are free to change the criteria and their respective weights.  End  

 

Edited by Tanima Banerjee

 

 

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