Union Budget: The practice of generating revenue through surcharges and cesses is unfair to states as this money does not form a part of the divisible pool.
India Union Budget 2019-20: State governments are set to lose Rs 45,000 crore in their share in the corporate tax to be collected by the Union government in 2019-20. Successive central governments have leaned on surcharges and cesses to shore up their revenues. However, this practice is unfair to state governments as surcharges and cesses are not considered part of the divisible pool and consequently not shared with the state governments as per the formula devised by the finance commission.
The 14th finance commission headed by former RBI governor YV Reddy had increased the share of states in the divisible pool from 32% to 42%. Its recommendations are applicable for a period of five years from 2014-15 to 2019-20. Basic calculations suggest that according to this formula, states would lose over Rs 45,000 crore in the current fiscal on account of their share in corporate tax alone as nearly 15% of the Union government’s projected corporate tax earning in this year will be through surcharges and cesses to be paid by the companies on their corporate tax liability.
Corporate Tax is one of the two biggest sources of the revenue of the Union government, the other being the GST. In the interim budget, the government has projected that it will earn Rs 7.61 lakh crore from GST and Rs 7.6 lakh crore from Corporation Tax in this financial year.
In 2017-18, the actual corporate tax collected by the Union government was Rs 5.71 lakh crore. And 15% or nearly Rs 85,000 crore of this amount was mopped up through surcharge, cess, penalties and interest recoveries etc. According to the formula suggested by the 14th finance commission, 42% of the cess and surcharge collection on corporation tax works out to be Rs 35,700 crore.
Similarly, according to the revised estimates for 2018-19, the government collected a total Rs 6.71 lakh crore through corporation tax, nearly 8% more than the budget estimate of Rs 6.21 lakh crore for the financial year.
However, of the total corporate tax collection, regular tax was 5.76 lakh crore and Rs 93,249 crore were earned through surcharge (Rs 63,711 crore) and cess (Rs 29,538 crore). This is almost 14% of the total collection of corporation tax. According to finance commission’s formula, the states share works out to be Rs 39,164 crore. But states are not entitled to this money as it has been collected by the Union government by levying cess and surcharges on the corporate tax and not as a regular corporation tax.
In the interim budget, then finance minister Piyush Goyal had projected more than 13% jump in direct tax collection in this financial year. According to the budget estimates, corporation tax collection will be Rs 7.6 lakh crore this year, a jump of nearly Rs 90,000 over the previous year. And the share of cess and surcharge will also go up considerably this time.
The government has projected to earn Rs 1.08 lakh crore through surcharge (Rs 73,368 crore) and cess (Rs 34,463 crore). This is more than 14% of the government’s total corporate tax earnings in the current fiscal. According to finance commission formula, states will lose nearly Rs 45,000 crore this year in corporate tax alone as the money collected by the Union government in form of surcharges and cesses levied on corporate tax will not form a part of divisible pool of central taxes that are divided between the Centre and states.