The Centre has tried to mitigate the state governments’ pain from an unmanageable revenue decline in Aril-May by generously transferring almost double the gross amount it collected during the period to the states as their share of central taxes. However, this has proven to be unsustainable; June tax transfers to states are understood to be 9% less than the monthly transfer of Rs 46,083 crore in the April-May period, at around Rs 42,000 crore.

The customary pattern is the Centre makes adjustments on state tax transfers based on actual receipts only during February-March, the final two months of a financial year. Till then the states get their shares as budgeted. Since states are facing a huge shortfall in their own tax revenue (including S-GST collections the shortfalls of which are not duly compensated owing to the overall decline in GST revenue growth), the deviation from this practice so early in the fiscal will hit them hard.

Also, the Centre’s claim that it has transferred the entire budgeted amount to states as tax devolution in April-May may not strictly hold true, given that in the comparable period in FY20, the monthly transfer was higher at Rs 49,544 crore. In FY20, the tax devolution was a little over Rs 1 lakh crore less than in the previous year at Rs 6.5 lakh crore and the amount budgeted for FY21 is Rs 7.84 lakh crore.

As such, the 14th Finance Commission period (FY16-20) hadn’t proved to be as gainful to states as expected. Despite the commission awarding an unprecedented spike of 10 percentage points (32% to 42%) to states in their share of the divisible pool, the total transfers during the commission’s award period increased at barely the same rate during the 12th Finance Commission period when the devolution was increased by just 1 pps (see chart). The overall decline in the tax revenue growth has impacted the devolution.

Notably, increased use of the cess/surcharge route by the Centre since the 14th FC award has resulted in a decline in states’ share in Centre’s gross tax receipts (including cess/surcharge proceeds) in recent years. As a percentage of Centre’s gross tax receipts, tax transfers to states had jumped from 28% in FY13 to 35% in FY16, but has since fallen to 32.4% in FY20.

According to official sources, improvement in collection of states’ own tax revenues and need to provide adequate funds for defence forces, have forced the Centre to start cutting tax devolution to states, taking into consideration the overall revenue decline. “The tax devolution is usually based on budget estimate till the revised estimate is presented. This has been the practice,” said DK Pant, chief economist, India Ratings.

The own tax revenues of most state governments more than doubled in May from the April trough, but were still in the range of 25-50% of the normal, information gathered by FE from several states and anecdotal evidence suggest.

Resumption of various economic activities after the easing of the lockdown restrictions and hikes in state excise duties on liquor aided the slow recovery. The states’ revenues could further improve in June. Even though, the Centre was eyeing to postpone some defence spending in Q1FY21, tension at the Indo-China border necessitated exigent defence acquisition expenditures, leaving less scope to squeeze such spending.

Near normal tax devolutions and the 60% hike in states’ ways and means advances by the Reserve Bank of India have allowed at least some states to refrain from excessive front-loading of borrowings or resorting to other forms of costly fund-raising. In response to requests made by several chief ministers, the Centre has raised the borrowing limit for the states to 5% of their respective gross state domestic product (GSDP) from 3% earlier, in a move that could make available an additional Rs 4.28 lakh crore to all states combined, if the facility is fully used up.

Source : Times of India