Ministry Sees Rs 2091cr Extra Burden
The finance ministry has contested the Tenth Finance Commission's (TFC) claim that its alternative scheme for devolution of resources between the Centre and states is revenue neutral. Instead, it has pointed out that the adoption of the scheme would entail an additional burden of Rs 2091 crore on the Centre in 1996-97.
It has further argued that in order to achieve revenue neutrality, the percentage share of the states should be reduced from the recommended level of 26 per cent of the gross proceeds of central taxes (in lieu of the existing share in income tax and basic/special excise duties and the grants in lieu of tax on railway passenger fares) and an additional 3 per cent (in lieu of the existing share in additional excise duties of sales tax on tobacco, cotton and sugar) in order to maintain the level of transfer at the existing level, in absolute terms.
These viewpoints have been voiced in the discussion paper on the recommendations of the TFC on the alternative scheme of sharing of resources by the Centre and the states. The paper has been circulated by the finance ministry for the benefit of parliamentarians. This is because the acceptance of the recommendations would entail Constitutional amendments, which would require parliamentary debate and sanction. While generally welcoming the TFC scheme, the ministry has instead suggested that the TFC recommendations should be accepted with some modifications.
The states share should be increased from the recommended level of 26 per cent and 3 per cent. The increased share should, however, not be merely in lieu of the existing shares in central taxes but should be in lieu of all existing transfers on the revenue account. This means that the fixed percentage of the pooled central taxes should be frozen for the next 15 years in lieu of all revenue transfers from the Centre to the states. The plan transfers would then be made only on the capital account.
Arguing against the 15-year freeze on the review of the devolution plan recommended by the TFC, the ministry has suggested that both horizontal and vertical distribution among the states should be reviewed every five years.
The ministry has argued that one of the flaws in the existing system of transfer to the states is the multiplicity of agencies determining the transfers, mainly the Planning Commission and the Finance Commission. The imbalances get compounded when the transfers mandated by the Constitution are used primarily to fill the non-plan revenue gaps, without any significant effort to determine them scientifically, using tax devolution rather than using grants-in-aid as the main medium of general purpose transfer. Although devolution was originally intended to act as a "balancing factor" to take care of vertical imbalances, over the years, it has overshadowed grants in the transfers ordained by the Finance Commissions resulting in fiscal indiscipline, the discussion paper states.
Further, it spells out the advantages in accepting the recommendation by stating that both the Centre and the states would share in the buoyancy of aggregate central tax revenues. The impact of fluctuations in receipts would also be felt alike by the Centre and the states.
Besides, the new devolution plan would permit the Centre to pursue tax reforms without the need to worry about the shareability of a tax. The Centre could thus accord equal attention to the goal of raising revenue since its proportion of share in all taxes will be equal.
The inclusion of taxes mentioned in Articles 268 and/or 269 would induce the Centre to mobilise resources through these taxes which, at present, are not being levied. The states would also benefit from this move.
Besides, the progress of tax reforms will be greatly facilitated if the ambit of tax sharing arrangement is enlarged, thereby ensuring a certainty of resource flow to the states.
The discussion paper has also informed that while implementing the TFC scheme, the Centre's authority to administer Central taxes will not be affected in any manner.