UP, Bihar get 30 pc of tax devolutions

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K. R. Srivats

New Delhi, Feb. 26

UTTAR Pradesh and Bihar are together going to get as much as 30 per cent of the net proceeds of all the sharable union taxes in each of the five financial years from 2005-06 to 2009-10, as per the recommendations of the Twelfth Finance Commission (TFC) that have been accepted in toto by the Government. The report was placed in Parliament on Saturday.

The next two substantial beneficiaries are West Bengal and Andhra Pradesh and together with Uttar Pradesh and Bihar, the four account for a nearly 45 per cent share in the divisible pool of Central taxes for the years 2005-10.

While Uttar Pradesh has been allocated a share of 19.264 per cent, Bihar will get 11.028 per cent of the divisible pool of Central taxes (excluding service tax). West Bengal and Andhra Pradesh will get a share of 7.057 per cent and 7.356 per cent, respectively.

The main reason why Bihar and Uttar Pradesh are getting such high shares is that TFC has accorded a higher weightage for the criterion of `population' (now 25 per cent as against 10 per cent in 11th Finance Commission) and `area' (10 per cent as against 7.5 per cent).

The weightage given by TFC to other distributive criteria such as income-distance, tax effort and fiscal discipline are 50 per cent, 7.5 per cent and 7.5 per cent, respectively. The criterion of index of infrastructure, which had a weightage of 7.5 per cent in the Eleventh Finance Commission, has been dropped.

As per the formula used by the Eleventh Finance Commission, the relative weights were 10 per cent for population, 62.5 per cent for income-distance, 7.5 per cent for area, 5 per cent for tax effort and 7.5 per cent for fiscal discipline and 7.5 per cent for the index of infrastructure.

Knowing that the high share allocation to Bihar and UP would stand out, the TFC has said that both tax devolution and grants should be taken into account while judging the extent of transfer to a State. The TFC has increased the proportion of grants to tax devolution in the scheme of transfers.

The TFC report held that it had not been possible for the commission to implement the "equalisation approach" fully as the disparities in the per capita fiscal capacities of the States were too large and some of the better-off States were also in serious fiscal imbalance.

"In the devolution scheme recommended by us, we have endeavoured to strike a balance among different criteria reflecting deficiency in fiscal capacities, cost disabilities and fiscal efficiency," says the TFC report.

(This article was published in the Business Line print edition dated February 27, 2005)
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