Centre releases 1.40 lakh crore on tax devolution to states

Subject : Polity

Section: Federalism

Concept :

The government has released the 14th instalment of tax devolution of more than ₹ 1.40 lakh crore to states.
“The Union Government has released 14th instalment of tax devolution to state governments amounting to ₹ 1,40,318 crore today, as against normal monthly devolution of ₹ 70,159 crore,” the finance ministry said in a statement on Friday.
This is in line with the commitment of the Union government to strengthen the hands of states to accelerate their capital and developmental expenditure, it added.
Currently as per 15th Finance Commission recommendations, 41 per cent of taxes collected by the Centre is devolved in 14 instalments to states during a fiscal year.

Tax Devolution

Tax Devolution is to make recommendations for distributing the net proceeds of taxes between the Union and the states.
It is one of the key responsibilities of a finance commission according to Article 280 (3) (a) of the Constitution.
Vertical Devolution :distribution of net taxable income between the Union and states.
Horizontal Devolution :distribution of net taxable income between the states.

Allocation to states

Central transfers to states include devolution from a divisible pool of taxes, transfers towards Centrally Sponsored Schemes, Finance Commission grants, other transfers and capex loans.
Of these, tax devolutions accounts for over 70 per cent .
Tax devolved to States are untied funds and hence states are free to spend them as per their discretion.

Grants to states

Revenue Deficit Grants to States:
- Revenue deficit grants emanate from the requirement to meet the fiscal needs of the States on their revenue accounts that remain to be met, even after considering their own tax and non-tax resources and tax devolution to them.
- Revenue Deficit is defined as the difference between revenue or current expenditure and revenue receipts, that includes tax and non-tax.
- The grants are released as per the recommendations of the Finance Commission in monthly installments to meet the gap in Revenue Accounts of the States post-devolution (of the divisible tax pool of the Centre).
- The 15th Finance Commission has recommended post devolution revenue deficit grants amounting to about Rs. 3 trillion over the five-year period ending FY26.
Statutory Grants:
- Article 275 authorizes Parliament to offer grants to states in need of financial help, rather than to all states. Every year, these funds are charged to India’s Consolidated Fund.
- Aside from this basic provision, the Constitution also provides for specific funds to promote the welfare of scheduled tribes in a state or to improve the standard of administration in scheduled areas in a state, such as Assam.
- The Finance Commission recommends the states that receive statutory grants (both general and particular) under Article 275.

Discretionary Grants (Article 282):

It empowers both the Centre and the states to make any grants for any public purpose, even if it is not within their respective legislative competence.
Under this provision, the Centre makes grants to the states. These grants are known as discretionary grants, the reason being that the Centre is under no obligation to give these grants and the matter lies within its discretion.
These grants have a two-fold purpose: to help the state financially to fulfil plan targets; and to give some leverage to the Centre to influence and coordinate state action to effectuate the national plan.