Continuous Rise and fall of The Tax Transfer to States; Adverse Impact on The Devolution

Around October 2019, March 2020, and then again in May, special excise has been imposed on petrol and diesel by the Centre. These taxes are not a part of the divisible pool, solely the essential excise is.

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Continuous Rise and fall of The Tax Transfer to States; Adverse Impact on The Devolution_thepolicytimes

Budget 2021 was expected to provide a quick resolution to prevent disputes over the direct taxes. Although this budget secured growth of 21% in the Centre’s tax devolution to States, around April-November, there was a huge fall in the tax transfers and it is likely probable that it will leap further as the Centre looks to offset the extra transfers which are being made in the initial months.

Role of the change in the fuel duties

The change in the fuel duties has indeed played a big role in boosting the non-shareable kitty of the Centre. In 2019, in early October, the Centre’s tax on diesel was Rs 15.83/litre which has changed to Rs 31.83/litre in the current year. Although the corresponding figures for petrol are Rs 32.98 and Rs 19.98, the divisible portion of the tax pool remained the same throughout. As a result of this, there was a leap in the gross excise duty collections by 48% in the last year around April-November.

Impact of Covid-19 on the devolution of FY21

While India eased the lockdowns around June 2020, the pandemic continued to restrain the economic activity. In comparison to the previous year, in FY21, the tax devolution to states was a little over Rs 1 lakh crore. After devolution to the states, during the period in April-November this fiscal, the Centre’s net tax revenue stood at Rs 6.9 lakh crore. With not a single transaction this fiscal, Covid-19 had a major impact on the strategic divestment plans of the government. Indeed, the fall in devolution was much sharper than in the Centre’s net tax receipts which are found to be attributable largely to the pandemic-induced overall decline in the tax buoyancy.

Related Article: Union Budget 2020-21 Major Highlights; Cuts in Income Tax

Unexpected retardation of the growth of the divisible tax pool

In recent years, there was unexpected retardation in the growth of the divisible tax pool. On one hand, the Centre was trying to bolster its tax revenue which decelerated the growth and in turn harmed the devolution. Curtailing the divisible pool will crimp the State’s wholly undesirable spending. Already, the divisible pool has got shrunken due to the assorted excises and even in FY20, it was quite visible that the tax transfers are declining unconventionally.

The PolicyTimes Suggestions

  • Although there was an overall decline in the tax revenue growth, if the Finance Minister takes up necessary strategic plans, then the adverse impact on the devolution can be lessened in the further years.
  • The share for states which is estimated to fall further in FY21 can also be taken into grip by making new economic laws and the loss in the economy due to the pandemic can also be revived.

Reference Articles

https://www.financialexpress.com/economy/tax-transfer-to-states-down-a-fifth/2173638/

https://www.cnbctv18.com/videos/economy/budget-report-card-fy21-heres-a-look-at-the-divestment-math-8035491.htm

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Continuous Rise and fall of The Tax Transfer to States; Adverse Impact on The Devolution
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Around October 2019, March 2020, and then again in May, special excise has been imposed on petrol and diesel by the Centre. These taxes are not a part of the divisible pool, solely the essential excise is.
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The Policy Times
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