In accordance with the recommendations put forth by the 16th Finance Commission, the Central government has confirmed its commitment to maintaining the existing framework for tax devolution to states. This entails the continuation of transferring a substantial 41% of all taxes collected by the Centre to the various state governments across India.
Tax Devolution Framework and Revenue Sources
The taxes encompassed within this devolution model include a comprehensive range of central revenue streams. These primarily consist of income tax, corporation tax, securities transaction tax (STT), customs duties, central excise duties, and the central component of the Goods and Services Tax (CGST). This structured approach ensures a predictable and significant flow of financial resources from the national exchequer to state administrations, supporting their developmental and administrative expenditures.
Horizontal Devolution and State-Wise Allocation
Beyond the overall 41% vertical devolution, the Finance Commission has meticulously outlined a formula for horizontal devolution, which determines the specific share each state receives from the total pool. This year's recommendations introduce a notable shift in the allocation criteria, placing increased emphasis on rewarding states that contribute more significantly to the national Gross Domestic Product (GDP).
This revised formula results in a favorable outcome for several southern Indian states. Karnataka, Kerala, Andhra Pradesh, and Telangana are all set to experience an increase in their share of the centrally transferred revenues over the forthcoming five-year period. This adjustment reflects an acknowledgment of their economic output and fiscal contributions.
Notable Exceptions and Other State Impacts
However, Tamil Nadu emerges as a singular exception within the southern region. Contrary to its neighbors, Tamil Nadu is projected to witness a marginal decrease in its allocation, with its share expected to dip by approximately 0.1%. This slight reduction highlights the nuanced calculations of the new devolution formula.
The commission's report also identifies other significant beneficiaries and states facing reduced allocations. Major industrial and economic hubs like Gujarat and Maharashtra are listed among the primary gainers, likely benefiting from the GDP-linked criteria. Conversely, several states, including Madhya Pradesh, Uttar Pradesh, West Bengal, Bihar, and Arunachal Pradesh, are anticipated to be among the notable losers, receiving a comparatively smaller share of the devolved taxes under the new arrangement.
Key Recommendations and Policy Shifts
In a departure from previous practices, the 16th Finance Commission has opted not to recommend specific revenue deficit grants or sector- and state-specific grants that were characteristic of earlier reports. This marks a strategic shift in fiscal policy approach at the central level.
Instead, the commission has strongly advised state governments to intensify their focus on augmenting their own revenue generation capabilities. A key recommendation involves the leveraging of technology to enhance the efficiency and yield of Goods and Services Tax (GST) collections, aiming to bolster state finances from within.
The panel has also raised important concerns regarding fiscal management at the state level. It has specifically flagged the issue of unconditional cash transfers, which currently constitute a substantial one-fifth of all subsidies and transfers disbursed by state governments, suggesting a need for more targeted fiscal interventions.
Focus on Urban Development
To promote systematic and orderly urban growth across the country, the commission has put forward recommendations centered on urban infrastructure. It advocates for a concentrated effort on improving drainage systems and urges the expedited reclassification of census towns into formal urban local bodies. This move is aimed at streamlining governance and enabling better planning and service delivery in rapidly urbanizing areas.
The implementation of these recommendations is poised to reshape the fiscal landscape between the Centre and states, influencing budgetary planning and development priorities for the next five years.
