Pandemic bites States’ share of Central tax kitty

Traditionally backward BIMARU States — Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh — are likely to see a 20-22 per cent increase in revenue from the Centre’s taxes and duties collection in FY22. But, when the Budget Estimate (BE) of FY22 is compared with the actual devolution in FY20, there is a decline in the budgeted numbers for many States.

According to the latest Union Budget, the net proceeds from Central taxes and duties to these four States for FY22 is budgeted at ₹2,78,691 crore. The allocation marks a 21 per cent increase from the Revised Estimate (RE) for FY21, at ₹2,30,208 crore.

Among these four States, the share of Central taxes to Madhya Pradesh will increase 20 per cent to ₹52,246.68 crore in FY22 from ₹43,372.09 crore in FY21, while proceeds to Uttar Pradesh and Bihar will go up 21 per cent each. Rajasthan will see the highest growth in Central tax revenue receipts among the pack, at 22 per cent. (Graph 1).

Lower base

However, the budgeted increase in the share of Central taxes to States for FY22 is from a lower base of pandemic-hit FY21, which witnessed a sharp fall in tax collections on account of the economic slowdown.

In fact, the BE of Central tax revenues to many States is less than the actual receipt of these States in FY20. For instance, Uttar Pradesh’s share for FY22 is budgeted at 1,19,395 crore. While it is a 21 per cent increase from the FY21 RE, it’s 3 per cent lower than the FY20 actuals of ₹1,22,729 crore. Similarly, the share of revenue to Tamil Nadu, Odisha, Andhra Pradesh and Karnataka have all gone down vis-à-vis the actual receipt for FY20.

For FY22, Uttar Pradesh, Bihar and Madhya Pradesh top the list of States that will receive the highest share of revenue from the Centre's divisible pool of taxes (Table 2).

Devolution formula

The devolution of taxes and duties and grants to States is based on the 15th Finance Commission recommendation that the Centre share 41 per cent of the net proceeds of taxes with the States, against the present 42 per cent. It also suggested that the Centre retain financial resources equivalent to 1 per cent of the net proceeds of taxes with itself, for financing the requirements of the newly formed Union Territories of Jammu & Kashmir and Ladakh.

The Finance Commission follows a horizontal devolution formula to arrive at tax devolution.

The formula assigns weightage for various criteria such as the States’ population (15 per cent), area (15 per cent) and income distance (45 per cent) to arrive at the devolution.

Among the components of Central taxes and duties to States, Central GST accounts for the largest share of devolution in volume followed by income-tax collection and corporation taxes (Table 3).

According to the Finance Commission’s assessment, gross tax revenues for the period FY22 to FY26 are expected to be ₹135.2-lakh crore, of which the divisible pool (after deducting cess and surcharges, and cost of collection) is estimated at ₹103-lakh crore.