States' share in central taxes come down to 29-32% against recommended 41%

The previous five years saw the states' share, except for 2019-20, in between 34.5% and 37%, whereas the recommendation was to give them a 42% share

The states’ share of central taxes has been hovering in the range of 29-32 per cent since financial year 2020-21 (FY21), when it should have been 41 per cent in line with the recommendations of the 15th Finance Commission. At a NITI Aayog meeting on Sunday, some states raised concerns over revenue sharing.

The previous five years saw the states’ share hover between 34.5 per cent and 37 per cent, except for FY20, whereas the recommendation was to give them a 42 per cent share.

In the first year of the Narendra Modi government (2014-15), the states’ share was just 27.13 per cent, when it was supposed to be 32 per cent, in line with the 13th Finance Commission’s recommendations.

There was no drastic difference between the 14th and 15th Finance Commission’s recommendations. However, to adjust for Jammu and Kashmir and Ladakh, which became Union territories, the total share of the states in central taxes was recommended at 41 per cent by the NK Singh-headed panel, against 42 per cent by the YV Reddy-led commission.

States are getting a lower share in the devolution as the Centre imposed more cesses. According to Article 271 of the Constitution, all central taxes and duties, except surcharges and cesses levied for specified purposes, shall be distributed between the Union and the states.

The share of cesses and surcharges in the central taxes has risen from just around 6 per cent in the first year of the Modi government (2014-15) to now over 20 per cent. It should be noted that a portion of cesses -- compensation cess under the goods and services tax (GST)--was devolved entirely to the states though there was some delay at times ever since it was introduced from July, 2017. 

It should be noted that cesses in excise duty are a bit underestimated. Only those cesses are taken that are stated to be administered by the revenue and other departments in the Budget. However, only basic excise duty is shared with the states. If we include other heads such as special additional excise duty on petrol, the share of cess and surcharges would be much higher. For instance, it comes to 24 per cent for 2022-23 (Budget Estimate).

However, Minister of State for Finance Pankaj Chaudhary told the Lok Sabha in a written reply last week that the various cesses on petrol and diesel collected by the central government are primarily used for funding centrally sponsored schemes, whereby funds are transferred to the states to implement them.

Even if the current structure is maintained, experts suggest that the government frontloads the money to be given to the states since tax collections have been much higher than estimated in the Budget for 2022-23. The Centre collected Rs 5.68 trillion in taxes in the first quarter of the current fiscal, which was 22.4 per cent more than that collected in the corresponding period of the previous year. The BE pegged the growth at just 1.8 per cent year-on-year for the entire FY23 (compared to actual numbers in FY22).

“We anticipate that central tax devolution will overshoot the FY23 Budget Estimates by over Rs 1 trillion, led by an expected upside in the Government of India’s non-excise tax revenues. If the upside is deferred to Q4 FY23, as was seen in Q4 FY22, it may not translate into a healthy capex push by the states, given the lead time required to plan and execute projects. An early reassessment of the monthly amounts being shared with the states may nudge them to boost their spending and support economic growth,” ICRA chief economist Aditi Nayar said.

NITI Aayog meeting

The states on Sunday used the governing council meeting of the NITI Aayog meeting to raise the issue of their dwindling resources and demanded that the Centre increase their share in the central taxes and extend goods and services tax (GST) compensation.

“The (Chhattisgarh) chief minister (Bhupesh Baghel) demanded an increase in the state’s share in the central taxes, citing that the burden on the resources of the states has been rising,” an official from the state public relations department said.

Baghel sought a five-year extension for the GST compensation paid to the state beyond June, claiming that the state was facing a revenue shortfall due to the new tax mechanism, he said.

Sources said other states too aired concerns related to inadequate devolution of funds and lack of resources. These complaints were taken note of by the NITI Aayog, they said.