Improved buoyancy in Q4: Centre releases extra Rs 45,000 crore to states from divisible pool

In FY20, tax transfers to states were down 15% on year.

Thanks to the increased buoyancy in tax revenues in the fourth quarter, the Centre released an ‘additional’ Rs 45,000 crore as tax devolution to state governments in FY21, the finance ministry said on Thursday. The devolution was 8.2% higher than the revised estimate (RE).

“As per RE 2020-21, Rs 5,49,959 crore, being 41% of the shareable pool of taxes and duties were estimated to be released to the states. However, the ministry of finance has devolved an amount of Rs 5,94,996 crore, based on the initial estimates of shareable pool that would be collected in 2020-21,” the ministry said in a statement.

The Centre had cut the devolution target by Rs 2.34 lakh crore or 30% from the Budget estimate of Rs 7.84 lakh crore for 2020-21.

The additional amount was released in two instalments – Rs 14,500 crore was released along with the 14th regular instalment of devolution on March 26, whereas the second instalment of Rs 30,500 crore was released to the states on March 31, 2021. Top recipient states are Uttar Pradesh (Rs 1,06,687 crore), Bihar (Rs 59,861 crore) and Madhya Pradesh (Rs 46,922 crore).

The Centre’s aggressive use of the cess route to bolster its own tax revenue has in recent years decelerated the growth of the divisible tax pool, thereby adversely impacting the states’ tax revenue. Though trend was there throughout the 14th Finance Commission award period (FY16-20), it was most visible in FY20, with tax transfers declining, unconventionally. In FY20, tax transfers to states were down 15% on year.

As a percentage of gross tax receipts, tax transfers to states had jumped from 28% in FY13 to 35% in FY16, but has since fallen to 33% in FY20. As per a report by the Centre for Policy Research, the actual tax transfers to the states in the 14th FC period (FY16-20) were Rs 6,84,645 crore less than the level estimated by the commission due to lower revenue productivity than assumed.

According to an FE analysis, the Centre may garner additional net tax receipts of around Rs 90,000 crore in FY21 over the RE of Rs 13.4 lakh crore, due to higher mop-ups from corporate and personal income taxes. It may also get an additional Rs 30,000 crore from ‘Union excise duties’ net of transfers to the states. GST collections have also been robust.

Revenue secretary Tarun Bajaj told FE that tax receipts in FY21 will be ‘substantially higher’ than RE. Data released by the Controller General of Accounts showed that net tax revenue rose 9.1% on year in April-February against the revised projection of an about 1% contraction.

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