Centre cuts tax transfers to states by a fifth in October

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November 30, 2020 6:45 AM

Despite a sharp revenue slump, the Centre transferred budgeted amounts to state governments as their tax share from divisible pool in April-May, but has since found this practice unsustainable – October transfers were a fifth less than envisaged in Budget, at Rs 37,233 crore

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Despite a sharp revenue slump, the Centre transferred budgeted amounts to state governments as their tax share from divisible pool in April-May, but has since found this practice unsustainable – October transfers were a fifth less than envisaged in Budget, at Rs 37,233 crore (see chart on Pg 2). To be sure, many states have in recent months seen a rise in own tax revenues (OTR) from the lows witnessed in the lockdown period.

From the range of 25-50% of normal in May, OTR of most states in October either surpassed or was at par with the same in the year ago month. Information gathered by FE show that Karnataka collected Rs 9,272 crore as OTR in October, up 14% on year and Rajasthan garnered Rs 5,544 crore (up 25%). Kerala’s own tax collection in October was about 90% of the mop-up in the year-ago month.

In FY20, the tax devolution to states was a little over Rs 1 lakh crore less than in the previous year at Rs 6.5 lakh crore. According to Icra, the shareable tax pool may turn out to be Rs 13.4 lakh crore in FY21, 30% lower than the budgeted amount of Rs 19.1 lakh crore. The agency also projected the central tax devolution to the state governments at about Rs 5 lakh crore (after adjusting for Centre’s extra transfers of Rs 48,400 crore in FY20) in FY21, as against Rs 7.8 lakh crore budgeted.

As such, the 14th Finance Commission period (FY16-FY20) hadn’t proved to be as gainful to states as expected. Despite the commission awarding an unprecedented spike of 10 percentage points (32% to 42%) to states in their share of the divisible pool, the total transfers during the commission’s award period increased at barely the same rate during the 12th Finance Commission period when the devolution rate was increased by just 1 pps.

The overall decline in tax revenue growth has impacted the devolution. Increased use of the cess/surcharge route by the Centre since the 14th FC award has also resulted in a decline in states’ share in Centre’s gross tax receipts (including cess/surcharge proceeds) in recent years. As a percentage of Centre’s gross tax receipts, tax transfers to states had jumped from 28% in FY13 to 35% in FY16, but has since fallen to 32.4% in FY20.

The customary pattern is the Centre makes adjustments on state tax transfers based on actual receipts only during February-March, the final two months of a financial year. Till then the states get their shares as budgeted. However, given the extra-ordinary situation due to Covid-19, the adjustments this year started earlier.

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