Finance Commission keeps tax devolution for states at 41% in FY22

Illustration: Ajay Mohanty
The 15th finance commission has kept the transfer to states from the divisible tax pool to 41 per cent for 2021-22 to 2025-26. This is the same level as was recommended in its interim report for the current financial year and the previous finance commission report, if reorganisation of Jammu and Kashmir is taken into account. 

It is at the same level of 42 per cent of the divisible pool as recommended by the 14th Finance Commission, the Commission said, adding that however, a required adjustment has been made of "about 1 per cent due to the changed status of the erstwhile state of Jammu and Kashmir into the new Union Territories of Ladakh and Jammu and Kashmir".

The gross tax revenues for a five-year period are expected to be Rs 135.2 trillion. Of that, the divisible pool (after deducting cesses and surcharges and cost of collection) is estimated to be Rs 103 trillion, according to the Commission.

States' share at 41 per cent of the divisible pool comes to Rs 42.2 trillion for 2021-26 period. Total grants are pegged at Rs 10.33 trillion. 

"Including total grants of Rs 10.33 trillion and tax devolution of Rs 42.2 trillion, aggregate transfers to states is estimated to remain at around 50.9 per cent of the divisible pool during 2021-26 period," the Commission said.

Commission chairman N K Singh told Business Standard that his team has done a balancing Act and roughly granted 50-50 to the states and the Centre. "We recommended it in a neutral way without any bias," he said. 

Total transfers (devolution + grants) constitutes about 34 per cent of estimated gross revenue receipts of the Centre, leaving adequate fiscal space for it to meet its resource requirements and spending obligations on national development priorities, the Commission added.

The commission attributed its decision to keep devolution intact in terms of percentage of divisible pool to maintaining predictability and stability of resources, especially during the pandemic.

The panel sought to allay the concerns of southern states. This was done by giving 12.5 per cent weight to demographic performance in the devolution. There was apprehension among these states that since the terms of reference had asked about considering the 2011 census, the states that do better in terms of population control would be at a disadvantageous position. The Commission gave 15 per cent weight to the population criteria. 

Singh said the commission recalibrated the criteria so that southern states are not left behind by giving 12.5 per cent weight to demographic performance. 

The Commission gave Rs 2.9 trillion revenue deficit grants to the states for the five year period. The Commission chairman said Madhya Pradesh and Andhra Pradesh would be the biggest beneficiaries of this grant, while Tamil Nadu's grant will go up. 

The Commission, which had in November last year submitted its report titled "Finance Commission in Covid Times" to President Ram Nath Kovind, gave 2.5 per cent weight to tax and fiscal efforts of the states for deciding the devolution.

Of Rs 10.33 trillion, the Commission recommended grants to the tune of Rs 4.36 trillion for local governments for the five-year period. 

"We favour a fixed amount rather than a proportion of the divisible pool of taxes to ensure greater predictability of the quantum and timing of fund flow," the report said.

Of these total grants, Rs 8,000 crore is performance-based grants for incubation of new cities and Rs 450 crore is for shared municipal services. A sum of Rs 2.37 trillion is earmarked for rural local bodies, Rs 1.21 trillion for urban local bodies and Rs. 70,051 crore for health grants through local governments.

The commission recommended that all states which have not constituted their finance commissions must constitute them, act upon their recommendations and lay the explanatory memorandum as to the action taken thereon before their respective legislatures on or before March 2024.

The Commission gave Rs 31,755 crore as grants for health services to the states. It recommended that the health spending by the states should be increased to more than eight per cent of their budget by 2022.

"We recommend that primary health care should be the number one fundamental commitment of each and every state and that primary health expenditure should be increased to two-thirds of the total health expenditure by 2022," the Commission said. 

The Commission also recommended that public health expenditure of the Centre and the states together should be increased in a progressive manner to reach 2.5 per cent of GDP, as sought by the National Health Policy. 

Among performance-based incentives the Commission recommended grants of Rs 4,800 crore (Rs. 1,200 crore each year) from 2022-23 to 2025-26 for incentivising the states to enhance educational outcomes. 

The Commission also gave Rs 6,143 crore for online learning and development of professional courses (medical and engineering) in regional languages (matribhasha) for higher education in India.

Keeping in view the extant strategic requirements for national defence in the global context,  the Commission re-calibrated the relative shares of union and states in gross revenue receipts by reducing our grants component by one per cent. This will enable the union to set aside resources for the special funding mechanism it has proposed.

It proposed the creation of a non-lapsable fund -- Modernisation Fund for Defence and Internal Security. The fund would have a total fund of Rs 2.38 trillion over a five-year period.

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