Cess, surcharge share doubles to 19.9% of central taxes in FY21: Report

The share of cesses and surcharges in the gross tax revenue of the Centre has nearly doubled to 19.9 per cent in 2020-21 from 10.4 per cent in 2011-12, leading to the 15th Finance Commission to recommend a higher grant-in-aid and lower tax devolution to the states, according to a report.

Under the existing Finance Commission (FC) framework, the cesses and surcharges collected by the Centre are not part of the tax devolution. And, the massive spike in the same has forced the FC to suggest higher grant-in-aid to the states to compensate for the low growth in tax devolution which is pegged at 41 per cent during the operation of the 15th FC award, India Ratings said on Tuesday in the report.

The key reason for higher growth in grants-in-aid and lower growth in tax devolution to the states is the increase in the proportion of the central cess and surcharges as they are not part of the tax devolution to the states, said the agency's Principal Economist Sunil Kumar Sinha.

As a result, the transfer from the Centre to the states including non-finance commission transfers declined to 48.6 per cent in 2019-20 from 53.4 per cent in 2011-12, he said.

The Centre is yet to accept the proposals on grants to the states totalling Rs 1.8 lakh crore, said the report.

According to the latest FC award, the share in central taxes has declined for eight states. Andhra Pradesh saw a decrease of 35 basis points (bps) to 4.05 per cent, Assam by 24 bps to 3.13, Karnataka by 118 bps to 3.64 per cent, and Kerala by 60 bps to 1.93 per cent, it added.

Odisha saw a decline of 22 bps to 4.53 per cent, Tamil Nadu by just 2 bps to 4.08 per cent, Telangana by a sharp 40 bps to 2.10 per cent, and Uttar Pradesh by 27 bps to 17.94 per cent.

This makes Karnataka the biggest loser with of a loss of 118 bps, followed by Kerala losing 60 bps of the share and Telangana by losing 40 bps, the report said.

The biggest gainer was Maharashtra with an increase of 64 bps to 6.32 per cent share in central taxes, followed by Rajasthan 38 bps to 6.03 per cent, Arunachal Pradesh 33 bps to 1.76 per cent, and Gujarat gaining 31 bps to 3.48 per cent share, it added.

The report has recommended a whopping 92.3 per cent rise in grants-in-aid to the states during award period of FY22-FY26 over the 14th FC report. But, the increase in tax devolution is only 7 per cent, or an overall 17.2 per cent growth in transfers to the states.

Accordingly, the top-five states in central tax share and grants-in-aid are Uttar Pradesh at 16.3 per cent, Bihar (9.1 per cent), Bengal (7.7 per cent), MP (7.3 per cent) and Maharashtra (6.4 per cent).

On the revenue deficit grants to the states, the report has recommended allocating 1.92 per cent of the gross revenue receipts of the Union worth Rs 2,94,514 crore as revenue deficit grants to 17 states till 2025-26. These states are Andhra Pradesh, Assam, Haryana, Himachal Pradesh, Karnataka, Kerala, Manipur, Meghalaya, Mizoram, Nagaland, Punjab, Rajasthan, Sikkim, Tamil Nadu, Tripura, Uttarakhand and Bengal.

The latest FC report comes against the background of the coronavirus pandemic, which has ravaged the finances of the Union and the states. Thus, it lays down a realistic fiscal consolidation path offering three scenarios for fiscal deficit at the Union level and a range for aggregate state fiscal deficits over its award period of FY22-FY26, instead of the earlier practice of putting a number to fiscal consolidation, the agency added.

Despite this, the fiscal arithmetic of the states will alter significantly in 2022-23 with the ending of the GST compensation and the FC report is not clear whether this particular aspect has been considered while projecting the range for aggregate state fiscal deficits for FY22-26, Sinha said.

The report suggests the share of the states in the divisible pool of central taxes at 41 per cent during the award period, down from 42 per cent in the 14th FC award period of FY16-20. The reduction is due to the conversion of Jammu and Kashmir into a Union territory.