FM Arun Jaitley pushes the envelope but execution holds key

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March 1, 2015 4:01 AM

with total transfer to states at 62% of gross tax receipts and a road map for GST, the budget has ushered in financial autonomy for states. now the states need to get their act together

Finance minister Arun Jaitley has embarked upon an important aspect of Indian polity — co-operative federalism. In keeping with the true spirit of this concept, the Budget has devolved 42% share of the divisible pool of taxes to states. This unprecedented increase would empower states with more resources. The devolution would be of the order of R5.24 lakh crore in FY16 against R3.38 lakh crore as per the revised estimates for FY15. Another R3.04 lakh crore would be transferred by way of grants and plan transfers. Thus, the total transfer to states will be about 62% of the total tax receipts of the country.

In addition, owing to the fact that the Finance Commission has not distinguished between special category and other states, and with a view to giving eastern states the opportunity to grow faster, the Budget proposes additional financial assistance for them. The overall transfer would thus be gigantic.

Another feature of the Budget relates to the introduction of the goods and services tax (GST). The FM has not only reiterated his commitment towards the implementation of GST,  but also called it a tax policy tool to revive growth and investment. In fact, the GST will play a transformative role in the way our economy functions by giving it buoyancy, developing a common Indian market and reducing the cascading effect on the cost of goods and services.

To facilitate a smooth transition to GST, the Budget proposes to increase the present rate of service tax plus education cess from 12.36% to a consolidated rate of 14%. In addition, it has been proposed to subsume education cess and secondary and higher education cess in the central excise duty. In effect, the general rate of central excise duty of 12.36%, including the cesses, is being rounded off to 12.5%. In the same way, it proposes to revise the specific rates of central excise duty on certain other commodities.

In spite of all these efforts, the Budget has not commented upon or asserted the recommendation of the Finance Commission regarding the creation of an autonomous and independent GST compensation fund through legislative action in a manner that would give reasonable comfort to the states — in fact, it is silent on this.

The Budget, therefore, is a leap towards cooperative federalism, but it would depend on the states’ capacity to utilise the funds. It would also depend on the requisite preparations towards capacity building by the states. Also, the strength of co-operative federalism would depend on the extent to which the Union government transfers centrally sponsored schemes to the states, as recommended by the Finance Commission.

By Mahesh Purohit, Director, FPEPR

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