The issue of the goods and services tax (GST) offset controversy may have been postponed for now, but the Center and the states, on opposite sides in that debate, find themselves again in a similar position, this time on the Current situation. discussion of a possible review of the state’s share of the divisible income group.
The Union government has asked the 15th Finance Commission to review the states’ share in the divisible tax pool and possibly reduce it from the current 42%, a person familiar with the matter said on condition of anonymity. States have fiercely opposed this measure in the past, and several states have made a representation to increase their share of total taxes to 50%.
Both facts are known, but the controversy over GST compensation, although resolved, may make the Finance Commission’s task difficult. He is expected to present his final report on the return in the next few days.
“The Center incorporated additional terms of reference, with a proposal to further reduce the share of the states in the divisible group, which will leave virtually nothing. If done, it will be unethical and a blow to the states’ fiscal autonomy, ”said Kerala Finance Minister TM Thomas Isaac.
At the center of the debate is what five years ago was hailed as a major push for federalism.
The previous 14th Finance Commission, in a historic step in 2015, dramatically increased the state’s share of the divisible pool, the depository where all taxes are collected before being divided between the Center and the states, from 32% to 42%, keeping that tax refund. it should be the main source of funds transfer to the states.
Now, the Center wants it reviewed. The coronavirus disease and its impact on lives and livelihoods appear to have lent some urgency to the Center’s case. “The Center’s argument is that it supports a disproportionately high amount of spending on centrally sponsored schemes and there are persistent revenue pressures due to the Covid situation,” the person quoted above said.
The chairman of the 15th Finance Committee, NK Singh, declined to comment on the matter due to confidentiality reasons.
The Constitution, through articles 280 to 281, establishes financial commissions, established every five years, a mechanism for dividing taxes and income vertically, that is, between the Center and the states, and horizontally, that is, between all the states, depending on their levels of development. , prosperity and regional needs.
The 15th Finance Commission was established in November 2017 to recommend the transfer of resources for the period 2020-25. He had to submit two reports. The first, consisting of recommendations for the 2020-21 financial year, was presented to Parliament on February 1, 2020.
The final report for the 2021-26 period must be submitted before October 30, 2020.
The Center, in its terms of reference for the current Finance Commission, included a provision on the reduction in the state’s share of 42% in total taxes due to the creation of the newly formed Union territories of Jammu and Kashmir and Ladakh. The creation of these new TUs naturally meant that the overall participation of the states had to go down.
In its first report for the period 2020-21, the 15th Finance Commission accordingly reduced the participation of the states by 1%, that is, from 42% to 41%. But the most important problem has not been solved. Four meetings have been held with state finance ministers on the issue, said the person cited in the first instance.
“Most states have told the Finance Commission that they want their share to go up to 50%,” Isaac said.
West Bengal Finance Minister Amit Mitra has been attacking the Center for what he alleged was an attempt to “control” the finance commission’s terms of reference. On August 1, he accused the Center of trying to “intervene” directly.
“The Center will continue to pressure the finance commissions, the states will also want more, but the Finance Commission will have to make an objective and fair evaluation and make its own decision. If you follow the Center’s line, then the institution will lose its sanctity, ”said M. Govinda Rao, a leading economist who was a member of the 14th Finance Commission.
According to Rao, the ruling parties in the Center, over the years, have tended to implement more central schemes that fall into the domain of the states for political advantage. “The expenditure of the Center on programs in state subjects has increased from 13% to 17% in recent years, while that of concurrent subjects has increased from 15% to 19%. This allows the Center to take ownership of the social assistance plans. But it is also a burden on their finances, ”explained Rao.
The 15th Finance Commission has also been mandated to further review the impact of the 14th Finance Commission’s recommendations (which increased the state’s share to 42%) on the Center’s fiscal position.
The latest budget estimated the states’ total tax share at ₹ 7.84 lakh crore for 2020-21. The participation of an individual state is determined by a predetermined formula. Several factors go into the criteria on which the weights are assigned, including population, income distance, forest cover, and area. Income distance is defined as the difference between the per capita income of a state and the average per capita income of all states. Lower income states can get a higher share. For example, according to the 14th Finance Commission award, Bihar, a poorer state, had a 9.7% tax share, while Haryana, a richer state, had 1.1%. “The Finance Commission is currently studying the funding patterns of centrally sponsored schemes as a possible solution,” the first cited person said.
The Center bears most of the spending on centrally sponsored schemes, such as the National Health Mission (NHM), Sarva Shiksha Abhiyan (SSA) and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). The funding ratio between the center and the state is 60:40 and for the northeastern and mountainous states it is 90:10.
According to Rao, one of the mandates of the current Finance Commission is to award sector grants to states based on measurable performance on various parameters. “If the sector subsidies are more, the tax refund will have to go down. Also, revenue projections are falling due to Covid. Therefore, it will be a difficult decision. “
One of the key mandates of the 15th Finance Committee is to analyze all the implications of the GST and the problems related to the large deficit in collection and the high volatility in GST revenues.
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