The Hindu Editorial Summary

Editorial Topic : Union Government’s Rein on Financial Transfers to States

 GS-3 Mains Exam : Economy

Revision Notes

Question : Discuss the impact of the declining share of gross tax revenue for States from 35% (2015-16) to 30% (2023-24) despite the recommendations of the 14th and 15th Finance Commissions. How has the increase in cess and surcharge collections contributed to this decline?

Reduced State Share in Gross Tax Revenue:

• Finance Commission recommends a percentage of net tax revenue for States.
• Net vs. Gross revenue: Gross includes cess, surcharges, UT taxes, collection costs.
• 14th & 15th Finance Commissions recommended 42% & 41% share respectively (of net revenue).
• But States’ share of gross revenue declined from 35% (2015-16) to 30% (2023-24).
• Though gross tax revenue doubled for the Union government, States’ share only doubled.

Reasons for Decline:

• Cess and surcharge collection increased significantly (5.9% to 10.8% of gross revenue).
• This revenue isn’t shared with States and is used for Union government schemes.

Impact on States:

• Less money for States through tax devolution and grants-in-aid.
• Grants-in-aid declined from ₹1.95 lakh crore (2015-16) to ₹1.65 lakh crore (2023-24).
• This creates more discretionary funds for the Union government.
• It affects equity in financial resource distribution among States.

Centrally Sponsored Schemes (CSS):

• Another channel for Union government transfers to States.
• Union government partially funds schemes, States contribute the rest.
• Wealthy States can leverage Union finances and implement more CSS.
• Less wealthy States might have to borrow to contribute, increasing liabilities.
• This widens the gap in public finances between wealthy and less wealthy States.

Central Sector Schemes (CSec Schemes):

• Fully funded by the Union government in specific sectors.
• Larger share of finances allocated to CSec Schemes compared to CSS.
• Potential for allocating funds to benefit specific States/constituencies.

Limited Discretion for States:

• CSS and CSec grants are non-statutory (not based on legal provisions or Finance Commission formulas).
• These grants account for 12.6% of gross tax revenue.
• They are tied grants meant for specific schemes, reducing States’ financial freedom.

Unequal Distribution of Resources:

• Union government retains over 50% of gross tax revenue.
• It also has a fiscal deficit of 5.9% of GDP.
• This concentrates financial power with the Union government while limiting its spending responsibilities.

Future Concerns:

• 15th Finance Commission noted the Union government’s argument for reducing States’ share.
• Similar arguments are expected before the 16th Finance Commission.
• This trend weakens cooperative federalism.