NEW DELHI: Most states have requested the 16th Finance Commission for an increase in their respective share in the tax devolution kitty, citing reasons ranging from poverty level and population count to contribution to the nation’s economic growth and prosperity. And, almost all of them were unanimous in one demand: their aggregate share in the Centre’s divisible tax pool should be increased from 41% to 50%.
With a visit to Uttar Pradesh on June 4, the commission led by Arvind Panagariya wrapped up its consultations with 28 states to understand each state’s fiscal health and needs that it will factor in before finalising its award for sharing of the Centre’s tax revenues for the five years ending FY31.
The first division between the Centre and the 28 states taken together is called vertical division of the Centre’s tax revenues, while the second is the division of kitty among 28 states called horizontal devolution.
The 15th Finance Commission recommended that 41% of the divisible segment of central taxes will go to all states. This was against a 42% share for all states during the 14th Finance Commission (FY16-20).
Striking a judicious balance, the 15th FC in its award assigned a lower weight of 15% to ‘population’ than 27.5% by the previous FC, while giving a respectable weight of 12.5% to progress made in curbing population growth to balance the needs represented by the latest population and progress towards population control, for inter-se distribution of resources among states from the Centre’s divisible tax pool. The 15th FC had given weightage for income distance to 45%, geographical area 15%, demographic performance 12.5%, forest cover 10%, population 15%, and tax collection effort 2.5%.
In their representations to the 16th FC, southern states and some others have sought a weightage reduction in the income distance from 45% to 30-35%. Income distance refers to the disparity between a state’s per capita income and the state with the highest per capita income, with states with lower per capita incomes receiving a larger share to promote equity and reduce disparities among states. Bihar, with the lowest per capita income, had been a major beneficiary of this criterion, along with Uttar Pradesh.
Tamil Nadu suggested that the weightage to income distance be reduced to 35%, while Maharashtra requested that it be brought down to 37.5%. A substantial reduction in weight could result in a shift in the inter-state share of states in the devolution kitty in favour of states with high per capita income. It has to be noted that the 15th FC had reduced the income distance weight to 45% from 50% in the 14th FC. So, a similar reduction in weight for this criterion can’t be ruled out after factoring in the progress in per capita income over the last six years.
Similarly, Gujarat, Karnataka, Telangana and Tamil Nadu have sought rewards for contributing to the nation’s economic growth and prosperity. Tamil Nadu suggested that a state’s contribution to the country’s economy be made a criterion for horizontal devolution with a weight of 15%.
Bihar has suggested inclusion of the multi-dimensional poverty index devised by the NITI Aayog as a key criterion for determining each state’s share from the divisible pool of tax revenues, with a weight of 17.5%. This would benefit states including Bihar and UP with a higher share of poverty in the country.
Resource-starved Bihar sought a grant of Rs 1.79 lakh crore to support various sectors and accelerate development, while Punjab sought a special package of Rs 1.3 lakh crore citing the burden of being a border state and contribution to food security.
Odisha, Kerala and Maharashtra sought inclusion of cesses, surcharges, and non-tax revenues of the central government in the divisible pool for distribution among states.
A review of the previous FC awards shows that while at an aggregate level, the states’ access to “non-tied” (mandatory and unconditional) central funds increased significantly due to the liberal award from the divisible tax pool by the 14th FC (FY16-20) from 32% to 42%, the intended benefit was curbed by FY20. The share of cess and surcharge in the Union government’s gross tax revenue, which is not part of the divisible kitty, had steadily risen from around 9% in the 13th FC (FY11-15) to 15% by the end of the 14th FC in FY20. It then rose sharply to over 20% in FY21, the first year of the 15th FC award. Thereafter, it moderated to around 17% as the Centre cut cess on petrol and diesel to stem inflationary pressures in May 2022.
Source: The Financial Express
