The Editorial Analysis- A Timely Gesture

Tax Devolution to States- Relevance for UPSC Exam

• GS Paper 2: Federalism- Devolution of powers and finances up to local levels and challenges therein.

Tax Devolution to States in News

• Recently, the Central Government decided to transfer a large chunk of tax devolution dues to States in one go.
• The norms for the ₹1 lakh crore interest-free loans offered to States for discretionary projects this year could also be reviewed to help it gain greater traction with State governments.

Capex push: Proactive Tax Devolution to states

Tax Devolution to States

• Reason: Higher than anticipated buoyancy in tax receipts has nudged the Finance Ministry into raising the States’ monthly share of the divisible pool of taxes from about ₹48,000 crore in the first quarter of 2022-23, to ₹58,332.86 crore for August.
  • Surplus cash balances with the exchequer have created room to transfer two months’ dues to States in one go, translating into a significant lump sum of nearly ₹1.17 lakh crore.
• Significance: It is a pragmatic step that will not only lend impetus to fresh capital spending on the ground but also temporarily soothe tempers amid a fresh round of unease between the Centre and States.

Why this Move is Important for States?

• End of GST Compensation Phase: States no longer have the fallback option of assured revenues from GST Compensation in the five years till June 30, 2022.
  • Even for the GST dues that accrued this year, the Centre frontloaded the release of around ₹87,000 crore to States for April and May.
  • Although accruals in the GST Compensation Cess account at the time were just ₹25,000 crore, by dipping into its own coffers.
  • With another ₹35,000-odd crore of GST dues outstanding for June, the overall recompense for States from GST will be around ₹1.22 lakh crore, less than half of the ₹2.5 lakh-odd crore in 2021-22.
• Changes in the Borrowing Norms of States: There is another uncertainty facing States that has led to extremely tentative behaviour from their treasuries in recent auctions of State development loans- changes in their net borrowing norms.
  • While the Centre had pegged States’ borrowing limit at 3.5% of their Gross State Domestic Product for the year, this ceiling is to be pared in accordance with off-budget debt raised by States since 2020-21.
  • However, Finance Ministry clarified that only their off-budget debt for 2021-22 will be adjusted against the ceiling and that too, in a staggered manner between this year and 2025-26.

Conclusion

• These steps should help States, which expressed concerns about dwindling revenues at the recent NITI Aayog governing council meet, back the effort to rev up the economy with a capex spree.
• Friction points between the Centre and States will persist with fluctuating intensities, but a rising economic tide will ease constraints for both.

15th Finance Commission

15th Finance Commission

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