Daily Editorial analysis:-

GS2: Federalism

Gross Tax revenue = Cess+Surcharge+Cost incurred to collect taxes+Net tax revenue.

Financial transfers from the center to the states happen only in net tax revenue.

Numders showing reduced fiscal transfer for states

• Discrepancy between FC’s recommendation and actual percentage of transfers:
  • 14th FC recommended 42% of net tax revenue: Center shared 35% of gross tax revenue.
    • Cess and surcharge are not calculated under net tax revenue.
  • 15th FC recommended 41% of net tax revenue: Center shared only 30% of gross tax revenue.
  • This discrepancy is due to increasing cess and surcharge, which is reducing net tax revenue. From 5.9% in 2015-16 to 10% in 2023-24 amounting to 3.3lakh crore.
• Lack of proportional financial tranfers: Center’s tax revenues are more than doubled. From 14 lakh crore in 2015-16 to 33 lakh crore in 2023-24. However, the state’s tax shares only doubled. From 5 lakh crore to 10 lakh crore.
• Grant’s in aid has reduced in absolute numbers.
  • 1.95 lakh crore in 2015-16 to 1.65 lakh crore in 2023-24.
• Combined share of statutory financial transfers from gross tax revenue has reduced from  48.2% to 38.32%.

Impact of reduced fiscal tranfers

• Reduction in transfer to states will increase discretionary expenditure to the center.
  • Center expends unshared tax revenue on development of states which are not routed through state’s budgets. Hence, center will have electoral influence.
• Tied nature of allocation: This impacts the state’s autonomy.
  • Eg: Central sector schemes(CSecS), central sponsored schemes(CSS). Center devices the schemes, states should implement these schemes with their financial resources. Allocation to CSS has increased from 2.04 lakh crore in 2015-16 to 4.7lakh crore in 2023-24.
  • For CSS based schemes Centre and states allocate funds in 60:40 ratio. This committed expenditure by poor states will increase their debt levels leading to Inter-state inequity.
• Problem with Central sector schemes (fully funded by center):
  • They are non-statutory grants. Neither recommended by the Finance commission nor by any law.
  • Centre has enormous discretion under CsecS, it can fund for the states it favors.
• Enormous financial powers with limited responsibility: In a combined capital expenditure (center +states), states share is high, however their share in overall fiscal transfer is less than 40%.

Fiscal federalism is the root of cooperative federalism and enhanced federalism hence, the central government should reconsider its measures in fiscal tranfers to states. This prevents cooperative federalism slipping away to conflicting federalism.