A 30% jump in states' tax share, yet transfers slow

THE 16TH FINANCE Commission will have a tough task, primarily because the mismatch between the resource mobilisation by the Centre and state governments and the rising requirements of spending of public monies on socio-economic development and critical infrastructure creation refuses to go away.

- PRASANTA SAHU

• THE FIRST OF A THREE-PART SERIES LOOKS AT THE ISSUES BEFORE THE SOON-TO-BE-CONSTITUTED 16TH FINANCE COMMISSION

In this context and keeping in mind the sustainable development goals and balanced regional development, the new commission, to be set up shortly, will among other things decide on the pattern of distribution of the net proceeds of taxes between the Centre and states for the five years beginning April 2026.

A review of the previous FC awards shows that while at an aggregate level, the states' access to "non-tied" (mandatory and unconditional) central funds increased significantly due to the liberal award from the divisible tax pool by the 14th FC (FY16-20), the intended benefit was curbed by FY20.

The Centre sharply raised nonshareable taxes via assorted cesses on auto fuels. Because of this, the pandemic and the general slowing of tax revenue growth in a sputtering economy, the average annual growth in tax devolution to states in the 14th FC period was 15.8%, the same as in the previous five years (see chart).

And in FY21-24, the first four years of the 15th FC's six-year award period, the growth in tax devolution slipped further to 13.9% per annum, although the devolution formula remained unchanged. It is worth noting that the states had seen annual growth of 16.5% in tax revenue transfers from the Centre even during the 12th FC period (FY06-10).