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Centre front-loads tax transfers to states, 82% of FY22 BE released

As per extant norms, tax devolution is made in 14 installments to states in a year, one in each month up to February and three installments in March. Extra transfers would be adjusted in future installments depending on overall collections.

So, front-ending of devolution in this financial year is a sort of reciprocation by the Centre when tax collections are doing pretty well.
So, front-ending of devolution in this financial year is a sort of reciprocation by the Centre when tax collections are doing pretty well.

The Centre on Thursday announced the release of an extra installment of monthly tax devolution for January, the second such release in FY22. This is intended to strengthen the hands of states to accelerate their capital and developmental expenditure and ameliorate the adverse effects of Covid-19 pandemic.

For January, finance minister Nirmala Sitharaman authorised release of two installments of tax devolution amounting to Rs 95,082 crore against the monthly devolution of Rs 47,541 crore required as per the Budget estimate (BE). In November 2021 also, the government had devolved two installments totaling Rs 95,082 crore to states.

It is seen that the gross tax revenue could be higher by Rs 3 lakh crore (including divisible pool and non-divisible cess and surcharge receipts) over the BE of Rs 22.17 lakh crore. The states’ share is 41% of the divisible pool of the central taxes.

As per extant norms, tax devolution is made in 14 installments to states in a year, one in each month up to February and three installments in March. Extra transfers would be adjusted in future installments depending on overall collections.

After the pandemic hit the tax revenues in FY21, the Centre had retained the Budget transfers for the first two months as per BE before lowering the monthly transfers from June onward till February, which resulted in the states receiving a quarter of their annual share in central taxes in March alone compared with just 14% in the year ago month. So, front-ending of devolution in this financial year is a sort of reciprocation by the Centre when tax collections are doing pretty well.

The Centre’s gross tax revenue grew by 50% in April-November of FY22 `against the required rate of 10% (over the actual of FY21) to achieve the Rs 22.17-lakh-crore target for the current financial year. So, the actual devolution to states could exceed by a decent margin against the FY22BE of Rs 6.66 lakh crore. Till January, the Centre has released Rs 5.45 lakh crore or 82% of the FY22BE for devolution.

To improve the liquidity of states, the Centre has also already released the entire back-to-back loan component of Rs 1.59 lakh crore to the states in lieu of shortfall in release of GST compensation during the current fiscal.

“This (advance devolution) is in line with the commitment of the government to strengthen the hands of states to accelerate their capital and developmental expenditure to ameliorate the deleterious effects of Covid-19 pandemic,” the finance ministry said in a statement.

Improved revenues and a resolve to pump-prime the economy helped state governments to front-load their capital expenditure. Data gathered by FE of 18 states showed that these states reported a combined capex of Rs 2.1 lakh crore in April-November of FY22, up 66% on the year, compared with a decline of 34% witnessed in the corresponding period of FY21. The combined capex of all states need to grow 44% on year to achieve their combined capex target of Rs 7.23 lakh crore for FY22.

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