Union’s control over money transfers to States
Finance Commission of the Fourteenth Year:
- It proposed giving the States 42% of Union tax income, a clear increase of 10% over the 13th Finance Commission’s recommendation.
15thFinance Commission:
- With the exception of the devolution to Jammu and Kashmir (J&K) and Ladakh, which were reclassified as Union Territories, it kept this 41% recommendation.
- It should be 42% if the shares of J&K and Ladakh are included.
- The Union government cut back on its financial assistance to the States.
- In order to raise its discretionary spending, it raised its overall revenue.
The suggestions made by the Finance Commission:
- The Union government’s net tax revenue divided among the States.
The following are some examples of how the gross and net tax receipts differ:
- Collecting expenses
- Union territories to receive a portion of tax revenue
- tax and other fees.
- The recommendations of the Fourteenth and Fifteenth Finance Commissions were for the States to receive 42% and 41%, respectively, of the net tax revenue.
- According to the budget estimate, the percentage of gross tax revenue was only 35% in 2015–16 and 30% in 2023–24.
- Between 2015–16 and 2023–24, the Union government’s gross tax collection increased from ₹14.6 lakh crore to ₹33.6 lakh crore.
- Between these two years, the States’ portion of the Union tax revenue increased from ₹5.1 lakh crore to ₹10.2 lakh crore.
- While the share of States only increased, the Union government’s gross tax collection more than doubled.
- Between 2015–16 and 2023–24, the total amount of grants-in-aid given to the States decreased from ₹1.95 lakh crore to ₹1.65 lakh crore.
- From 48.2% to 35.32%, the Union government’s gross tax revenue was composed primarily of mandatory financial transfers.
Reasons for the States’ decreased gross revenue share:
- After subtracting the revenue collections under, the net tax revenue is calculated.
- cess and additional charge
- income derived from Union Territories
- tax administration costs.
- The greatest and fastest-growing sources of revenue collection are levies and surcharges.
- In 2015–16, the Union government’s gross tax revenue came from the collection of cess and surcharges, which amounted to 5.9% in 2023–24.
- The Goods and Services Tax (GST) cess that is collected to make up for the States’ revenue losses as a result of the introduction of the GST is not included in this computation.
What problems exist?
- Financial transfers to States in the form of grants-in-aid or tax devolution are declining.
- The Union government’s gross revenue has the effect of increasing the amount of discretionary funds available for expenditure.
- This may have an impact on how fairly States distribute their financial resources.
- Direct financial transfers from the Union government to the States can be made through two channels: Centrally Sponsored Schemes (CSS) and Central Sector Schemes (CSec Schemes).
- The allocation for CSS increased through 59 CSS from ₹2.04 lakh crore to ₹4.76 lakh crore between 2015–16 and 2023–24.
- Just ₹3.64 lakh crore (2023–24) in real funds are sent to the States under CSS; the remaining ₹1.12 lakh crore is allocated for other costs.
- CSS shared schemes: Matching grants are available to states that can contribute matching funds from their state budgets.
- Regarding interstate equity in public budgets, this has two distinct effects.
- Rich States can afford to use CSS to apply equal financial commitments and turn Union finances inward.
- States with lower incomes will be forced to invest their borrowed funds in these CSS, which will raise their own liabilities.
Schemes for Cybersecurity:
- In areas where the Union government has sole institutional or legislative authority, they receive complete funding from the Union government.
- In 2023–24, the CSec Schemes allocation climbed from ₹5.21 lakh crore in 2015–16 to ₹14.68 lakh crore.
- Through the CSec Schemes, the Union government can distribute funds with the intention of assisting particular States or districts.
- The Union government is in charge of directly implementing CSec schemes.
- Merely ₹4.25 lakh crore is allocated to the States out of the total ₹19.4 lakh crore for the CSS and CSec Schemes in 2023–2024.
Way Ahead:
- Since the financial transfers made through the CSS and CSec Schemes are not predicated on any laws or Finance Commission-established formulas, they are not statutory transfers.
- The non-statutory funds are tied grants, meaning that they must be used for the designated programmes for which they are given.
- States now have less flexibility in allocating public funds as a result.
- The Union government, which keeps almost 50% of its gross tax receipts, has a 5.9% GDP budget deficit.
- As a result, the Union government has considerable financial authority but little responsibility for spending.
- The Fifteenth Finance Commission observed that the States’ 42% share of Union tax revenue had been maintained, despite the Union government’s arguments to the contrary.
- Given the significant budgetary imbalances at the centre, there might not be any evidence to support suggesting any more increases in the States’ share of federal taxes.
- It is necessary to reevaluate the function of non-shareable cesses and surcharges.
- The Twelfth Finance Commission advocated the establishment of a lending council, an impartial organisation that would supervise the amounts and types of loans given by the federal and state governments.
- The topic of non-merit subsidies should be thoroughly investigated by the Sixteenth Finance Commission.
- But leaving out “unjustified” subsidies when deciding on grants might put the Finance Commission in the middle of a political firestorm.
