: Opinion: Get cess, surcharges into divisible pool #IndiaNEWS #News By Seela Subba Rao Most of the federal governments are vested with powers to raise tax revenues while the States are responsible

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Opinion: Get cess, surcharges into divisible pool #IndiaNEWS #News
By Seela Subba Rao

Most of the federal governments are vested with powers to raise tax revenues while the States are responsible for undertaking a large part of the public expenditures. The allocation of taxation powers vis-à-vis responsibilities per se creates an imbalance known as vertical imbalance. Further, the existence of vast regional disparities contributes to horizontal imbalances among States in terms of their resource capacity to expenditure responsibilities.
At present, all taxes of the central government except cesses and surcharges are to be shared with the States in accordance with the recommendation of the Finance Commission. The prime aim of these transfers in the past was to correct the differentials in revenue capacity as well as cost disability factors inherent in the economies of the States. Another reason was to foster fiscal efficiency among the States. The criteria used in the past for distribution of the share of States can be categorised broadly under three groups: Need factors such as population and income measured either as distance from highest income or as inverse; cost disability factors such as area and infrastructure distance; and fiscal efficiency indicators such as tax efforts and fiscal discipline.
Under tenures of the past few Finance Commissions (FC), these distributive criteria had converged. The criteria and weightages assigned for determination of shares of States too underwent many changes. The FCs have been assigned the responsibility of transfer of net tax revenue to States following objective and rational criteria in the best interest of cooperative federalism.
15th Finance Commission
The present 15th Finance Commission has recommended that the States be given 41% of the divisible tax pool of the Centre during the period 2021-26 as against 42% recommended by the 14th FC for 2015-20. The adjustment of 1% is to provide for the newly formed union Territories of Jammu & Kashmir and Ladakh from the resources of the Centre. The criteria for distribution of central taxes among the States for the period 2021-26 is the same as that of 2020-21. However, the reference period for computing income distance and tax efforts has undergone certain changes (for 2020-21, the reference period is 2015-18 and for 2021-26, the reference period is 2016-19). Resultantly, the individual share of States was slightly affected.
The 15th Finance Commission suggested that the Centre bring down the fiscal deficit to 4% of the GDP by 2025-26. For States, it recommended the fiscal deficit limit (as % of GSDP) of: 4% in 2021-22, 3. 5% in 2022-23 and 3% during 2023-26. If a State is unable to fully utilise the sanctioned borrowing limit as specified during the first four years (2021-25), it can avail itself of the unutilised borrowing amount in subsequent years (within the 2021-26 period).

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