The Hindu Business Line : Central devolutions reveal skewed equity base, says study

Thiruvananthapuram, May 23 Devolution of tax as well as grants to States barring those at the lowest end of the per capita incomes have not always embraced the principle of ‘horizontal equity’, says a study of finances of 13 major States during the period from 1980-81 to 2005-06.

The purpose of the Constitutional provisions for devolution of taxes and grants is two-fold (a) vertical equity and (b) horizontal equity. The first takes care of the imbalances between the Union and the States due to limited revenue powers and vast expenditure obligations of the latter.

Horizontal equity enables States with poorer per capita income (per capita SDP) to provide a basic minimum level of services as the richer counterparts do.

Striking examples

States with low per capita income have got higher ranks in tax and grant devolution; the same has not been the case with higher and middle income States, according to author-researchers Mr R. Mohan and Mr D. Shyjan.

Two striking examples are Orissa and Kerala which have ranked low in tax and grant devolution throughout the period of study. Orissa has been always in the lowest income category.

Kerala, a middle-income State towards the beginning of the period and a high-income one towards the end, has consistently received a low rank in tax and grant devolution.

Punjab, a high-income State all through, has received a low share in tax and grant devolution.

Changes mooted

The study finds that the devolution of taxes during the latter period of the study has favoured the horizontal equity concept more. It suggested certain changes in tax devolution criteria and recommended a more important role for grant devolution in ensuring horizontal equity.

Grant devolution, especially that falling outside the purview of the Finance Commissions, has a substantial discretionary component in it. Tax devolution in latter stages of the study period has a statistically significant association with horizontal equity. These indicators will have to be kept in mind while evolving the formulae for tax and grant devolution.

Ranking

Failure of richer States to suitably exploit their tax base has not been adequately factored while deciding the devolution of grants. Those which have fared well on this count have not got adequate ranking in devolution. Low-income States have improved their tax effort and have come to occupy the front rank. The middle-income States have fallen behind here, while high-income States ended up as a poor third.

It is suggested that traditional as well as performance indicators should be used in combination to devolve taxes. The task before the 13th Finance Commission is challenging in the background of the proposed Goods and Services Tax, the implementation of which will have a substantial impact on taxing powers of the Centre and the States.

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