Central Government Tax Distribution to States
The central government distributes its gross tax revenues to States based on recommendations from Finance Commissions (FCs). These distributions include:
- Tax devolution
- Grants-in-aid
- Centrally sponsored schemes (CSS)
The recommendations of the 15th Finance Commission have been implemented, but those of the 16th are pending parliamentary approval.
Key Issues in Central Transfers
- Erosion of fiscal autonomy due to GST implementation.
- Revenue losses from GST rate cuts.
- Constraints on State-level spending due to dominance of CSS.
- Increasing Centre's cesses and surcharges not shared with States.
- Declining devolution shares for high-performing States.
Regional Disparities and Equity Concerns
Disparities exist in expenditure needs and fiscal capacity across States. Notably, wealthier States argue they contribute more to central tax revenues but receive less in tax devolution.
Examples include:
- Direct tax figures often reflect the location of collections rather than actual income generation locations.
- States like Karnataka, Maharashtra, and Tamil Nadu contribute significantly but receive smaller shares.
Gross State Domestic Product (GSDP) as a Proxy
GSDP is suggested as an alternative measure to estimate State contributions to central tax revenues. Correlations with tax collections are as follows:
- GSDP and direct tax collections: 0.75
- GSDP and GST collections: 0.91
These correlations indicate GSDP can be a meaningful indicator of tax accruals.
Devolution and Transfer Statistics (2020-21 to 2024-25)
- The Centre devolved 41% of gross tax revenues to States based on 15th FC recommendations.
- Total transfers amounted to ₹75.12 lakh crore.
- Uttar Pradesh received 15.81% of transfers.
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- Bihar and West Bengal received 8.65% and 6.96%, respectively.
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- Maharashtra contributed the highest in tax collections (40.3%) but received only 6.64% in transfers.
Implications of GSDP-based Distribution
- If transfers were based on GSDP shares, States like Maharashtra, Gujarat, Karnataka, and Tamil Nadu would benefit.
- Conversely, States such as Uttar Pradesh, Bihar, and Madhya Pradesh would see reductions.
GSDP-based allocation would better reflect State contributions and improve perceived fairness in fiscal transfers.
