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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.
Capex push to states economy

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