Clawing Back Finance Commission Devolution of 41% For Funding Central Expenditure

 

BUDGET 2021-22

 

CLAWING BACK FINANCE COMMISSION DEVOLUTION

FOR FUNDING AGRICULTURE INFRASTRUCTURE

 

Subhash Chandra Garg

Economy, Finance and Fiscal Policy Strategist; Former Finance Secretary, Government of India

 

 

Finance Commission Recommends Continuation of Share of States in Central Taxes at 41%

 

The15^th Finance Commission recommended “retaining the vertical share of 41 per cent of the divisible pool of taxes for the States during the award part of this Commission”. This meant continuation of the share of States in the central taxes as recommended by the 14^th Finance Commission. The 15^th Finance Commission reduced the share of States from 42% to 41% to adjust for the share of J&K, which had become two union territories.

 

The “divisible pool” is the critical part of the recommendation. The Article 270 of the Constitution, after the 80^th Constitutional Amendment defines the divisible pool. Article 270 prescribes that “all taxes and duties referred to in the Union List”, “except the duties and taxes referred in articles 268 and 269” and “surcharges on taxes and duties referred to in article 271” and “any cess levied for specific purposes” shall be shared between the Union and the States”. As articles 268 and 269 speaks on marginal taxes like tax on stamp duty and consignment sale, all union taxes including income tax, corporation tax, central GST, excise duties are sharable with States. Article 280 makes “net proceeds of taxes” sharable, which allows the central government to exclude the cost of collection of taxes from sharable tax proceeds. Likewise, tax proceeds attributable to union territories are not part of the net proceeds of taxes.

 

The central government can, however, keep union taxes outside the divisible pool by levying surcharges, which article 271 permits the Parliament to levy by increasing any of the union duties and taxes. The central government can also levy any cess for any specific purpose. The surcharges are usually meant to be for serving any extra-ordinary needs and cesses for servicing any specific purposes.

 

Government of India Tax Revenues Have Been Static

 

The Government has revised downwards all revenue estimates for not only the current year FY2020-21 but also FY2021-22. Tax revenues are projected to be only Rs. 13.44 lakh crores in the revised estimates of FY 2020-21 and Rs. 15.45 lakh crores in the budget estimates of FY 2021-22 against the Budget Estimates of Rs. 16.34 lakh crores. Government’s revised estimates for FY2020-21 are lower than the actual tax revenues of Rs. 13.57 lakh crores collected in FY2019-20, whereas the estimated tax revenues of FY 2021-22 are 5.5% lower than the budgeted revenues of FY2020-21.

 

Government of India’s share of tax revenues, net of States’ share, in three financial years of 2018-19 to 2020-21 have been static in nominal terms. Centre’s net tax revenues in these three years have been Rs. 13.17 lakh crore, Rs. 13.57 lakh crore and Rs. 13.45 lakh crore.

 

Central Government Has Been Reducing Share of States in Taxes

 

The central government has increasingly reduced the effective share of States in the union taxes and duties.

 

Gross tax revenues (including States’ share), in the three years (2018-19, 2019-20 and 2020-21) have been Rs. 20.80 lakh crore, Rs. 20.10 lakh crore and Rs. 19.00 lakh crores respectively, whereas the central government appropriated Rs. 13.17 lakh crore, Rs. 13.57 lakh crore and 13.45 lakh crore, respectively. This gives the central government’s share at 63.3%, 67.5% and 70.8% in these three years. Correspondingly, states got reduced share in taxes of 36.3%, 32.5% and 29.2% in these years. The central government has been effectively chipping away the share which the states get in the central taxes determined by the Finance Commissions.

 

For the financial year 2021-22 (BE), the central government has estimates share of States at Rs. 665,572 crore, whereas the gross tax receipts are estimated at Rs. 2,217,059 crore. This gives the states effective share of only 29.6%, much less than the Finance Commission mandated headline share of 41%.

 

Cesses Are Means to Achieve Reduction in States’ Share

 

The feat of reducing States’ share sharply in financial year 2020-21 (to 29.2% from 32.5% in 2019-20) was achieved by increasing non-sharable special additional excise duties and road and infrastructure cess on petrol and diesel on May 16, 2020 by whopping Rs. 13 per litre on diesel and Rs. 10 per litre on petrol.

 

The total incidence of excise duties on diesel since May 16, 2020 to 1^st of February 2021 was Rs. 31.8 per litre on diesel and Rs. 32.9 per litre on petrol (these duties were Rs. 3.56 per litre on diesel and Rs. 9.48 per litre in 2014, when the NDA government had taken over). With such large imposition of non-sharable special additional excise duties and road and infrastructure cess on diesel and petrol, the sharable basic excise duty was only Rs. 2.98 per litre on petrol and Rs. 4.83 on diesel. The rest was all non-sharable components.

 

Consequence of this policy choice by the Government of India has been amply reflected in the gross collection of excise revenues and the share of the States therein. The excise duties’ revised estimates for FY2020-21 are Rs. 361,000 lakh crore. The estimated share of states in the excise duties revenues for FY2020-21 are Rs. 19,578 crore only. All the states get only 5.4% of the share of all the excise duties and cesses collected by the central government as against Finance Commission recommended share of 41%.

 

Budget 2021-22 Continues the Tradition

 

A new cess- agriculture infrastructure and development cess has been levied by bringing necessary law through the Finance Act 2021. The agriculture infrastructure and development cess of Rs. 2.5 per litre on petrol and Rs. 4 per litre on diesel has been imposed. Rs. 2.5 litre of agriculture infrastructure and development cess has been almost entirely sourced by reducing sharable basic excise duty on petrol from Rs. 2.9 per litre to Rs. 1.4 per litre, whereas this cess of Rs. 4 per litre on diesel has been sourced by reducing Rs. 3 per litre from sharable basic excise duties from Rs. 4.8 to Rs. 1.8 per litre and reducing non-sharable additional special excise duty by Rs. 1 per litre.

 

From 2^nd February 2021, the total incidence of duties and cesses on diesel comprise only Rs. 1.8 per litre of sharable basic excise duties and the remaining Rs. 30 per litre is made of Rs. 8 per litre of special additional excise duties, Rs. 18 per litre of road and infrastructure cess and Rs. 4 per litre of agriculture infrastructure and development cess- all non-sharable with the states. Likewise, for petrol, the total excise duties comprise of sharable basic excise duties of Rs. 1.4 per litre and non-sharable road and infrastructure development cess of Rs. 18 per litre, non-sharable additional special excise duty of Rs. 11 per litre and Rs. 2.50 per litre of non-sharable agriculture infrastructure and development cess.

 

The customs duties have also been made more non-sharable by converting existing basic customs duties into agriculture infrastructure and development cess on several items. All alcoholic imports of wine, whiskey and other beverages had 150% of basic customs duty. These duties have been split into 50% as basic customs duty and remaining 100% as agriculture infrastructure and development cess. Several other items like apple, crude palm oil, lentils, coal, lignite urea, cotton, silver, gold etc. have also seen this adjustment. The effective customs duties have not gone up, but a large part of the duty has been converted into non-sharable.

 

States’ Share in Customs Revenues Will Also Start Declining Now

 

For FY 2021-22, the estimated excise duties revenues are Rs. 335,000 crore whereas States’ estimated share is Rs. 19,475 crore, which is only 5.81%. The States have effectively been deprived of their share in union excise duties.

 

For customs, the net tax receipts for RE20-21 are Rs. 112, 000 crore, whereas the share of States estimated for the year is Rs. 36,592 crore. This gives a share of 32.67%. For the year FY21-22, the estimated collection of customs revenues is Rs. 136,000 lakh crore whereas the estimated share of States is Rs. 40,216 crore, which brings the share of States down to 29.57%. The levy of agriculture infrastructure and development cess on select imported goods may have started the process of weening the States away from customs revenues from FY2021-22.

 

 

SUBHASH CHANDRA GARG

06/02/2021, NEW DELHI