New Tax Sharing Norm May Put Fiscal Deficit Target Under Strain
The fiscal deficit target of 4.5 per cent of gross domestic product (GDP) for the current fiscal year will come under pressure with the Centre having to absorb an additional devolvement of Rs 5,000 crore to the states following the Inter-State Council's decision to alter the existing formula, officials said.
They said that a clear picture would emerge once the Constitutional amendments were approved and the states too concurred. Since this would take some time, the finance ministry would be able to assess the impact on the fiscal deficit only towards the end of the current year, the officials added.
The Inter-State Council recently accepted the Finance Commission's recommendations that the devolvement formula should be fixed at 29 per cent of the Centre's tax collections. At present, the Centre shares only 77.5 per cent of the income-tax and 47.5 per cent of net excise duties with the states.
The new tax-sharing formula envisages that 26 per cent of gross proceeds of all Central taxes be assigned to the states. In addition, another three per cent of the Central taxes is to be assigned in lieu of existing share in additional excise duties. These percentages are to be built into the Constitution and fixed for 15 years.
The recommendations come into effect from April 1, 1996. As a result, the Centre will have to allow Rs 2,000 crore for the arrears in 1996-97 and an additional Rs 3,000 crore in the current fiscal year as per the estimated revenue targets. However, if the revenues do not meet projected targets, the share of the states would go down proportionately.
For the Centre, which is strapped for funds and is facing difficult prospects, especially with respect to receipts under customs, the pressure would be daunting. Ministry officials stated that with non-petroleum imports growth down to about two per cent, customs receipts are not growing at the projected level.
Officials are, however, confident that excise receipts would pick up later in the year. Even in 1996-97, after sluggish trends initially, the receipts rallied and the finance ministry was able to all but match its targets.
However, a significant aspect of the previous fiscal year was the large payouts by the ministry in terms of duty drawback to exporters. Normally, an exporter is paid back the duties, customs and excise, incurred on the inputs utilised for manufacturing the exported items.
In 1996-97, due to a shift in production structures, with exporters procuring more domestically, the duty drawback under excise was higher than expected by Rs 900 crore. As a result, the net excise collections for the year was that much short of the target.