States’ Tax Contributions
- States now get a 42% portion in the divisible pool of central taxes, up from 32% under the Fourteenth Finance Commission.
- After India’s states were whittled down to 28, this was adjusted to 41%.
- Between 2020–2021 and 2023–2024 (BE), the States’ effective contribution to the Center’s gross tax revenues (GTR) averaged over 31%.
- It was far less than the comparable share, which was close to 35% between 2015–16 and 2019–20.
- the increase in cesses and surcharges from 12.8 (twelve point eight)% of the Center’s GTR during 2015–16 to 2019–20 to 5 (eighteen point five)% during 2020–21 to 2023–24 (BE).
Assigned by the Finance Commission:
- The Finance Commission suggests a formula for distribution that outlines each State’s portion of the Union tax revenue allotted to them.
- Certain States have maintained since the First Finance Commission that since they have legitimately contributed more to the Union tax revenue than others, they should be entitled to a larger part of the Union tax revenue.
- Tax contributions received very little weight as a determining factor in the distribution formula throughout the first eight Finance Commissions.
- This tax payment has been removed from the distribution formula since the 10th Finance Commission.
The Finance Commissions’ duties include:
- To suggest the share of Union tax income that should be given to the States
- to suggest each State’s portion of the allotted tax revenue.
- The States’ share was limited to personal income tax and Union excise duties up until the 10th Finance Commission.
- Following that, the states’ shares of the total central tax revenue were determined.
- Each State’s portion of the allotted tax revenue is determined by a formula developed by the Finance Commission, which is based on the efficiency and equitable principles.
- Equity: A greater portion of Union tax money goes to the States with lower revenue and those with higher spending.
- The goal of efficiency is to incentivize states that maximise income collection and rationalise expenditure.
- The normative trade-off between efficiency and equity is still present in the Finance Commission’s subsequent recommendations.
- The distribution formula for income tax revenue has given income tax revenue collection and assessment a weight of 10% to 20% according to successive Finance Commissions.
- due to the fact that collection is a poor measure of contribution.
- The value of taxable goods consumed in a State is crucial in determining its contribution to Union excise duties.
Efficiency Measure:
- Since a state’s tax contribution is determined by its economic structure and degree of development, it can be used as an efficiency indicator.
- This efficiency indicator had only been given a weight of 10% to 20% by Finance Commissions.
- Population, a key determinant of the State’s budgetary requirements
- In the first seven Finance Commissions, it was given between 80% and 90% weight when it came to the distribution of income taxes.
Distribution of Tax Income:
- Since the 10th Finance Commission, tax effort and fiscal discipline have been included as efficiency indicators in the method used to distribute pooled central tax income (Weight of around 15%).
- The distribution formula in the 15th Finance Commission contained:
- Tax effort with a 2.5 percent weighting
- Weight of 5% for demographic performance.
- According to the 2011 Census, equality indices of population and per capita income were given 85% of the total weight.
Definitions:
- Tax effort is defined as the ratio of a state’s own revenue to its GDP.
- The ratio of a state’s own revenue to its revenue expenditures is known as fiscal discipline.
GST:
- The destination tax known as GST is based on consumption and is split evenly between the central and state governments.
- The Central GST accrual from a State to the Union government should be equal to the State’s State GST accrual (including the Integrated GST settlement).
- Under the GST, it is possible to calculate a State’s tax payment to the Union exchequer with accuracy.
The significance of GST:
- Given that the GST is a unified tax system, the estimates indicate that State tax efforts are not very different from one another.
- The size and composition of each State’s economy would affect the total amount of GST revenue received by that State.
- It highlights how crucial it is that this tax contribution be included in the distribution calculation as an efficiency measure.
- A State’s discretionary tax policy have no bearing on the State’s GST contribution.
- It solely shows the State’s true tax base, which is being utilised for the benefit of the country.
The Way Ahead:
- The relative shares of petroleum consumption differ amongst States, much like the GST, although these shares remain constant over time for each State.
- The proportion of a State’s petroleum consumption that goes towards funding the national coffers in the area of petroleum product customs and union excise taxes is determined by the State.
- include a State’s proportional petroleum consumption and GST contribution in the allocation formula.
- These two ratios show how citizens of a state differ from one another in terms of their personal and corporate incomes.
- In 2021–2022, the proportion of Central tax revenue received by the States from the CGST and Union excise duty is around 30%, while the corresponding ratio for personal and corporate income taxes is 64%.
- The two relative contributions of the States to the national coffers—the petroleum consumption and the GST revenue—are a good indicator of efficiency and are fair and accurate assessments of the contributions made by the States.
- There is a strong argument for the 16th Finance Commission to discuss and incorporate these ratios as an efficiency metric into the distribution formula, giving them a minimum weight of 33%.
