Finance ministry doubles January tax devolution to state governments

Front-loading of fund transfer to help states manage Covid, undertake capex

The finance ministry on Thursday released double the amount of tax devolution for January to state governments as Finance Minister Nirmala Sitharaman authorised the release of an advance installment of Rs 47,541 crore.

States would receive Rs 95,082 crore, or double their respective entitlement, during January. The front-loading of the fund transfer is meant to help states to carry out effective Covid management besides making the capital expenditure needed to support economic growth.

The government had released the first advance instalment of tax devolution of Rs 47,541 crore to states on November 22 last year.   “With the release of the second advance installment today (Thursday), the states would have received an additional amount of Rs 90,082 crore under tax devolution over and above what has been budgeted to be released till January 2022,” the ministry said in a statement.

“This is in line with the commitment of Government of India to strengthen the hands of states to accelerate their capital and developmental expenditure to ameliorate the deleterious effects of the Covid-19 pandemic.”

The share of states in central taxes — at the aggregate level of 41 per cent — was decided by the 15th Finance Commission. Typically, this is transferred in 14 instalments in a fiscal year. The adjustment between the Budget Estimate and the Revised Estimate of such transfers is made in March. In November, instead of devolving one instalment out of 14, two instalments were transferred.

The Centre had earlier transferred the entire Rs 1.59 trillion through back-to-back loan transfers for goods and services tax (GST) compensation shortfall for FY22, with the last tranche of Rs 44,000 crore transferred in October last year.

The back-to-back loan facility is the result of an agreement between the central and state governments in bridging the GST revenue shortfall of states under which the Centre borrows from the market and transfers the fund to states.

This debt will be serviced from the proceeds of GST compensation cess to be collected from items like cars and tobacco.