Tax devolution: Centre sticks to Budget estimate in May despite revenue shortfall

The 14th Finance Fee upped states’ share in divisible tax pool to 42% from 32%.

Regardless of a possible slowdown in tax revenues in Could, possible the worst affected month of this fiscal because of Covid-induced lockdown, the Centre has maintained tax devolution to states in keeping with the finances estimate (BE) for the month.
Like in April, the state governments have obtained Rs 39,175 crore as tax devolution in Could, a senior finance ministry official informed FE.

Going by the earlier 12 months’s development, the Centre could stick with BE for devolution within the preliminary months and do the changes in the direction of the tip of this fiscal, to think about a shortfall in receipts.

The Centre has set a devolution goal of Rs 6.66 lakh crore in FY22, an annual improve of 12%. In FY21, tax devolutions have been regular in April-Could, but it surely was lowered a bit from June onwards as revenues have been hit by Covid-induced lockdown. Due to buoyancy in tax revenues in Q4FY21, the Centre had launched in complete Rs 5.95 lakh crore or 8.2% extra in devolution over the revised estimate (RE) for FY21. But, the devolution was Rs 1.89 lakh crore decrease than the FY21BE of Rs 7.84 lakh crore. Devolution in FY21 was down 8.5% year-on-year whereas the Centre’s gross tax income (GTR) noticed a rise of 0.6% on-year (at Rs 20.16 lakh crore).

The Centre’s aggressive use of the cess path to bolster its tax income has lately decelerated the expansion of the divisible tax pool, thereby adversely impacting the states’ tax income. Although the development was there all through the 14th Finance Fee award interval (FY16-FY20), it was most seen in FY20, with tax transfers declining, unconventionally. In FY20, tax transfers to states have been down 15% per 12 months.

The 14th Finance Fee upped states’ share in divisible tax pool to 42% from 32%. Sarcastically, augmented use of the cess/surcharge route by the Centre since then has resulted in a decline in states’ share in Centre’s gross tax receipts or GTR (together with cess/surcharge proceeds).