In these conditions of enhanced responsibility, the difficulties of state governments have increased due to the fact in recent times states have received a significantly lesser share of central taxes compared to the legitimate expectation, based on finance commission recommendations, as well as the peak achieved earlier. According to the latest Finance Commission Report the share of states should be around 40% of gross taxes, but instead this has been around 29-30% in recent times. The union government has been resorting more and more to cesses and surcharges for raising resources, with their share in gross tax revenue almost doubling from around 10% to 20% within the last decade or so. As these cesses and surcharges are mostly not shared with states, the size of the divisible tool to be shared with states has been shrinking in relative terms. On top of it , cesses and surcharges are not always being used for the purpose for which these were raised, thereby further messing up fiscal responsibility and transparency.
In fact the need to be fair to states has increased after the GST regime of indirect taxes was established as this greatly limits the capacity of any state government to raise resources quickly, autonomously and more in keeping with their circumstances, as the power to decide indirect taxes is now more with the union government and the GST Council. Of course states are represented in the Council but their immediate ability to raise resources has certainly been affected adversely. The compensatory regime which was established for a limited period to temporarily sweeten the GST pill for state governments is also ending now and so it is all the more important for the union government to be more sensitive towards the financial needs of state governments. Unfortunately the union government has not quite lived up to this federal responsibility in recent times.
by Bharat Dogra
24/08/2022
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