While presenting the Interim Budget in Parliament, the acting Finance Minister claimed that the NDA government transferred significantly higher amounts to the States following the recommendations of the Fourteenth Finance Commission (FC), “in the true spirit of cooperative federalism”. Does this claim stand scrutiny?

While significantly enhancing the share of the States in Central taxes from 32 per cent to 42 per cent, the Fourteenth FC had projected the total devolution of Central taxes to the States to increase from an average of 2.8 per cent of GDP in the Thirteenth FC period (2010-11 to 2014-15) to 4.1 per cent on average (2015-16 to 2019-20). The actual transfer by the NDA government to the States in the five years of the Fourteenth FC period, including the Budget estimates for 2019-20, comes to only around 3.9 per cent of GDP on average.



Devolution dips

The actual devolution of taxes has fallen far short of the FC’s projections on account of two broad factors: first, the significantly slower average annual growth of GDP at current prices (11 per cent) than the projected growth rate (13.5 per cent), which led to lower tax collections than projected; and second, the shortfall in central tax devolution as a proportion of GDP in relation to the FC projections in four out of five years (Table 1). Why did the latter happen?

An expansion of cess and surcharges levied by the Centre shrink the size of the divisible pool of taxes in gross tax revenues. In other words, they help the Centre in mobilising tax revenues, which it does not need to share with the States.

The Fourteenth FC had noted that a majority of the State governments were therefore of the view that cesses and surcharges imposed by the Centre should either be eliminated or be made a part of the divisible pool, if they are continued beyond a specified period.

Cess, surcharge shares up

The share of cess and surcharges in the Centre’s gross tax revenue had increased from 7.5 per cent in 2000-01 to 13 per cent in 2013-14. This was a major reason why the Fourteenth FC had recommended the enhancement of the States’ share in the divisible pool of taxes from 32 per cent to 42 per cent and also advocated that the share of cess and surcharges in gross tax revenues to be brought down.



Disregarding this concern expressed by the Fourteenth FC, however, the NDA government has continued to expand revenue mobilisation through cesses and surcharges throughout its tenure, which has eroded the transferable resources of the States.

While gross tax revenues have grown at an annual average rate of 15.5 per cent from 2015-16 to 2019-20 (BE), the divisible pool of Central taxes has witnessed an annual average growth of 13.8 per cent only, leading to a declining share of devolved taxes in gross tax revenues. Revenues collected by the Centre through cess and surcharges grew at a much higher average annual rate of 24 per cent.

Aggregated over the five-year period, the share of the cess and surcharges (also including total tax collection cost) in gross tax revenues was projected to decline from 13 per cent under the Thirteenth FC period to 11 per cent under the Fourteenth FC period (Table 2).

This has actually risen to 18 per cent, leading to a decline in the divisible pool. Had the Centre maintained the States’ share in gross tax revenues at 37 per cent, as projected by the Fourteenth FC, the States would have received an additional ₹2.89 trillion in the period 2015-16 to 2019-20 as their share in Central taxes.

The higher revenue mobilisation by the NDA government through cess and surcharges has certainly not been in the spirit of cooperative federalism. The States have been deprived of a significant amount in Central tax revenues. The CAG and the Fifteenth FC Finance Commission needs to take cognisance of this in order to ensure that this trend is reversed in the next five years.

The writer is an economist and activist