Tax shifts to states for the fiscal year from April to November amounted to Rs.334 billion, compared to Rs. 4.22 billion for the same period last year.
Although the Center’s tax shift to states was assumed to grow 21% in fiscal year 21, transfers actually declined by the same rate from April to November and could decrease further as the year progresses as the Center tries to offset the additional transfers, which were made in the center the first few months. The decline in decentralization was much more pronounced than in the centre’s net tax revenue (after decentralization) (minus 8% from April to November), mainly due to the overall decline in tax lift caused by the pandemic.
The aggressive use of the tax route by the center to strengthen its own tax revenues has slowed the growth of the divisible tax pool in recent years and thus adversely affected the tax revenues of the states. Although the trend could be observed during the entire period in which the finance commission was awarded (FY 16 to FY 20), it was most evident in FY 20, as tax transfers declined unconventionally. In fiscal year 20, tax transfers to states fell by 15% compared to the previous year.
In fiscal year 20, tax shift to states was just over 1 billion rupees less than last year’s 6.5 billion rupees. According to Icra, the shareable tax pool could turn out to be Rs.13.4 billion in FY21, 30% less than the budgeted amount of Rs.19.1 billion. The agency also forecast a central tax shift to state governments to around Rs.5 billion (adjusted for the centre’s additional remittances of Rs.48,400 billion in FY20) in FY21 compared to Rs.78 billion in the budget.
Tax shifts to states for the fiscal year from April to November amounted to Rs.334 billion, compared to Rs. 4.22 billion for the same period last year. The Centre’s net tax revenue (post-state transfer) was Rs 6.9 billion for the April to November of this fiscal year.
The change in fuel tariffs / surcharges has played a huge role in promoting the center’s indivisible kitten. The center’s diesel tax (property excise tax, additional special excise tax and road / traffic tax) is currently Rs 31.83 / liter, compared to just Rs 15.83 / liter in early October 2019. The corresponding figures for gasoline are Rs 32.98 and 19, Rs 98. The divisible portion of the tax pool, however, remained the same at Rs 4.83 (diesel) and Rs 2.98 (gasoline).
In October 2019, March 2020 and then May, the center greatly increased the additional additional excise taxes on gasoline and diesel. These taxes are not part of the divisible pool, only the property tax. This explains the 48% year-over-year increase in gross excise tax collections to Rs.196 billion in the April-November period of this fiscal year, despite the centre’s gross tax receipts falling 13% over the projected 21% growth during the reporting period.
Therefore, the 14th period of the Finance Commission (FY 16 to FY 20) was not as profitable for the states as expected. Although the Commission awarded states an unprecedented 10 percentage point (32% to 42%) increase in their share of the divisible pool, total transfers increased slightly less during the Commission’s award period than during the Finance Commission’s 12th period 1 pps increased. Of course, the general decline in tax revenue growth had influenced decentralization.
As a percentage of the centre’s gross tax revenue, tax transfers to states had increased from 28% in FY13 to 35% in FY16, but have since fallen to 32.4% in FY20. The share of states could decrease further in FY 21.