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.