Capex push to states

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.