The Indian government, led by Prime Minister Narendra Modi, is seeking to reduce the federal tax revenues allocated to states, according to three sources with direct knowledge of the matter. The proposal will be presented to the constitutionally-appointed Finance Commission of India, which makes recommendations on tax sharing and other aspects of federal-state fiscal relations. This move could potentially lead to tensions between the two tiers of government.
*Proposal Details*
The panel, headed by economist Arvind Panagariya, will submit its recommendations by October 31, to be implemented from the fiscal year 2026-27. The recommendations are binding. The federal government will recommend reducing the share of taxes going to states to at least 40% from the current 41%, said one of the sources.
The proposal is expected to be cleared by the cabinet of ministers headed by Modi by the end of March and then sent to the Finance Commission, said a second source. A 1% swing in the states’ share of tax revenues could give the federal government about ₹35,000 crore, based on the expected tax collections for the current year. The final number will vary based on the individual year’s tax collections.
*Rationale Behind the Proposal*
The share of taxes going to state governments has increased from 20% in 1980 to 41% now. However, spending requirements for the federal government, particularly during economic slowdowns, have also increased. This has led to calls for a lower share of tax revenues going to states.
India’s federal government fiscal deficit is estimated at 4.8% of gross domestic product (GDP) for 2024-25, while the states have a fiscal deficit of 3.2% of the national GDP. States have a share of over 60% in total government spending in the economy and typically spend more on social infrastructure such as health and education, while the federal government’s spending is more focused on physical infrastructure.
*Impact on States*
The implementation of the national Goods and Services Tax (GST) in July 2017 has limited the states’ discretion in raising revenue. Since the COVID-19 pandemic, the federal government has also increased the share of cesses and surcharges, which are not shared with the states, to over 15% of the gross tax revenue from 9-12% earlier. A shift in resources available to the states could lead to changes in spending priorities.
*Discouraging Freebies and Debt Waivers*
The federal government is also likely to suggest ways to discourage states from giving cash handouts, debt waivers, and other so-called freebies for political gains. One way to do this would be to link federal grants given to states to make up the shortfall in state tax revenue to meeting certain conditions. Only after meeting those conditions will the states be eligible for such grants.
In the last five years, these revenue-deficit grants have declined from ₹1.18 lakh crore in 2021-22 to ₹1.37 lakh crore in the budget for 2025-26.
See insights and ads
পোস্ট প্রচার করুন · Promote post
Like
Comment
Send
Share
