Tax sharing with states to hurt Centre

DEVOLUTION TO STATES Availability of less resources will adversely affect Centre?s effort to reduce revenue deficit

The Union Budget has warned against depleting revenue resources for the Centre on the back of the rising devolution of its finances to state governments. Expenditure will remain constrained next year and for subsequent years till 2015, owing to the statutory requirement for the Centre to share an increased 32 per cent of Union taxes and duties with the states, the Budget said.

The availability of less resources would adversely affect the Centre’s effort to reduce revenue deficit in the remaining years of the 13th Finance Commission period, said the Budget presented in Parliament on Friday by Finance Minister Pranab Mukherjee. It has projected revenue deficit for the next financial year at 3.4 per cent of Gross Domestic Product (GDP).

The Budget also revised revenue deficit for 2011-12 at a higher 4.4 per cent of GDP, compared to 3.4 per cent projected in the Budget Estimates last year.

The Centre has to mandatorily share proceeds of all Union taxes with the governments of all states and Union Territories according to the provision of Article 275 (1) of the Indian Constitution. A finance commission is set up every five years to recommend this sharing percentage. The 13th Finance Commission, set up in 2009 under former finance secretary Vijay Kelkar, had recommended that the states’ share be increased from 30.5 per cent to 32 per cent for the period between 2010 and 2015.

“The recommended higher percentage of devolution of Central taxes to states, coupled with the higher grant to states recommended by the Finance Commission, would result in less resources for expenditure,” the Budget stated. It projected an over 18 per cent jump in states’ share of taxes and duties, at Rs 301,921 crore, during 2012-13, compared to the revised estimate of Rs 255,414 crore for the current financial year.

Net resources transferred to the states are also seen rising by 20 per cent to Rs 521,294 crore in 2012-13 .

The Budget has projected Gross Tax Receipts of Rs 10,77,612 crore for 2012-13 — a 19.5 per cent rise over the revised estimates of 2011-12. The gross tax collection will be 10.6 per cent of GDP in 2012-13, compared to 10.4 per cent in the Budget Estimates of 2011-12. “After devolution to states, the net tax to the Centre in 2012-13 is estimated to be at Rs 7,71,071 crore,” Mukherjee said while presenting the Budget.

He added that Plan and Non-Plan resources transferred to states and Union Territories (in the form of grants, loans and Central assistance) were likely to be at Rs 365,216 crore in 2012-13, according to the Finance Commission’s recommendations.

The government wants to spend an overall Rs 12,57,729 crore next fiscal, including non-plan expenditure of Rs 8,16,182 crore. Grants and loans to states would comprise over 8 per cent – Rs 66,396 crore – of this non-Plan expenditure. Also, Rs 1,06,026 crore – 24 per cent of Plan expenditure of Rs 4,41,547 crore – would be transferred to states in the form of Central assistance.