Capex push to states
- August 11, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Capex push to states
Subject :Economy
Section: Fiscal Policy
Context: The Centre has released an advance instalment in addition to the regular monthly instalment of tax devolution to states totalling Rs 1.16 lakh crore
Why?
- To increase capital and developmental expenditure.
- To ease fiscal pressure of states after the end of the compensation mechanism under the Goods and Services Tax (GST) regime
Concept:
How do States get revenue from the Centre?
- Article 280 of the Constitution mandates that each Finance Commission make recommendations about:
- the distribution of net proceeds of taxes between the Union and states (called vertical devolution) and
- the distribution of net proceeds of taxes also among states (called horizontal devolution).
Vertical Devolution:
- As per the 15th Finance Commission Recommendations, 41% of the divisible pool should be devolved to the States.
- While distributing the 41 per cent among states, the formula recommended the Finance Commission should be used – which takes into weight different parameters like
- Income Distance,
- Population of 2011,
- Area,
- Forest & Ecology,
- Demographic Performance and
- Tax Effort.
- Without being included in the Union Budget, the Centre transfers states’ share of taxes from the Gross Tax Revenue. This forms a significant part of the devolution.
- At present, 41 per cent of tax collected is devolved in 14 instalments during a financial year.
Horizontal Devolution:
For horizontal devolution, the 15th Finance Commission has suggested:
- 12.5% weightage to demographic performance,
- 45% to income,
- 15% each to population and area,
- 10% to forest and ecology and
- 2.5% to tax and fiscal efforts
States’ source of revenue from Centre:
- Devolution (States’ share of taxes): As states share taxes from the Gross Tax Revenue. (This is extra-budgetary)
- Scheme Related Transfer: As Centrally Sponsored Schemes from the Scheme Expenditure. (Based on Budget Allocations).
- Finance Commission Grants: As Transfer to States from the Transfers, Expenditure, and Other Expenses. (Based on Budget Allocations)
- Other Transfers: Other grants or loans. (Based on Budget Allocations).
Capital Expenditure
- Capital expenditure is the money spent by the government on the development of machinery, equipment, building, health facilities, education, etc.
- It also includes the expenditure incurred on acquiring fixed assets like land and investment by the government that gives profits or dividends in future.
- Along with the creation of assets, repayment of loan is also capital expenditure, as it reduces liability.
- Capital spending is associated with investment or development spending, where expenditure has benefits extending years into the future.
Different from Revenue Expenditure:
- Unlike capital expenditure, which creates assets for the future, revenue expenditure is one that neither creates assets nor reduces any liability of the government.
- Salaries of employees, interest payment on past debt, subsidies, pension, etc, fall under the category of revenue expenditure. It is recurring in nature.