Tax transfer to states down a fifth

By: |
January 19, 2021 4:25 AM

The Centre hiked special additional excise/cess levied on petrol and diesel sharply in October 2019, March 2020 and then in May. These taxes are not part of divisible pool, only the basic excise is.

The moot point is how the tax department can win the confidence of taxpayers.The moot point is how the tax department can win the confidence of taxpayers.

Though Budget FY21 assumed a growth of 21% in the Centre’s tax devolution to states, the transfers actually fell by the same rate in April-November and could plunge further in the remainder of the year as the Centre seeks to offset the extra transfers made in the initial months. The fall in devolution was much sharper than in the Centre’s net (post-devolution) tax receipts (down 8% in April-November), which is attributable largely to the pandemic-induced overall decline in tax buoyancy.

The Centre’s aggressive use of the cess route to bolster its own tax revenue has in recent years decelerated the growth of the divisible tax pool, thereby adversely impacting the states’ tax revenue. Though trend was there throughout the 14th Finance Commission award period (FY16-FY20), it was most visible in FY20, with tax transfers declining, unconventionally. In FY20, tax transfers to states were down 15% on year.

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, against Rs 7.8 lakh crore budgeted.

Tax devolution to states stood at Rs 3.34 lakh crore in April-November this fiscal compared with Rs 4.22 lakh crore in the year-ago period. The Centre’s net tax revenue (after devolution to states) stood at Rs 6.9 lakh crore during the period in April-November this fiscal.

The change in fuel duties/surcharge has played a big role in boosting non-shareable kitty of the Centre. The Centre’s tax on diesel (basic excise, special additional excise and road/infra cess) is currently Rs 31.83/litre, compared with just Rs 15.83/litre in early October 2019. Corresponding figures for petrol are Rs 32.98 and Rs 19.98. The divisible portion of the tax pool, however, remained the same at Rs 4.83 (diesel) and Rs 2.98 (petrol).

The Centre hiked special additional excise/cess levied on petrol and diesel sharply in October 2019, March 2020 and then in May. These taxes are not part of divisible pool, only the basic excise is. That explains the jump in gross excise duty collections by 48% on year to Rs 1.96 lakh crore in April-November of this fiscal even though the Centre’s gross tax receipts declined 13% on year during the period against 21% growth 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 slightly lower than the rate during the 12th Finance Commission period when the devolution was increased by just 1 pps. Of course, the overall decline in tax revenue growth had impacted the devolution.

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 share for states could fall further in FY21.

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