The reported recommendation of the 13th Finance Commission to raise the share of the states in the gross tax receipts of the Central government to 31.5% has to be read with the plan for the national goods and services tax. The Commission?s proposal will hopefully make the states more amenable to accept the switchover to the new tax system, as the buoyancy of the central taxes is expected to be higher than that of the states. The 11th Finance Commission was the first to extend the tax sharing criteria from just income tax and excise duties to all central taxes, recommending a 29.5% share of gross tax revenues, while the next one raised it to 30.5%. This is also a recognition of the fact that states have done a good job on the fiscal front. Their revenue deficit has been wiped out, going from a high of Rs 43,405 crore in 2007-08 to a surplus of Rs 37,058 crore in the 2009-10 budget estimates. In the period, by contrast, central revenue deficit has shot up to Rs 2,82,735 crore. But equally, if not more, important is the question of horizontal distribution between the states.
The finance commissions are still wrestling with a tax devolution formula that balances equity with fiscal efficiency. For instance, the 12th Finance Commission increased the weight given to population in the distribution formulae from 10% to 25%, while it reduced the weight for per capita income distance from 62.5% to 50%. In case of the income distance criterion, which favours the less well-off states, the middle- and high-income states have favoured a reduction in weight to 10%, while poor states like Assam want the weight to be increased to 70%. And the redistributive efforts have increased the tax share of the low-income states over the decades from just 48% in the 3rd Finance Commission award to 61% by the 12th Finance Commission, while that of the rich states has halved to 11% during the same period with no significant impact on inequalities. And a well-governed region like the South has seen its share go down from 25% to 20%. This was basically because of the gap-filling approach adopted by the finance commissions, which ensured more benefits to the less needy states and fewer benefits to the more needy ones. Continuing with such a skewed approach will not be politically sustainable and one can hope that the 13th Finance Commission will help evolve an innovative approach to remedy these shortcomings.
