Share of cess, surcharge in tax revenue doubles in 9 years

The share of cess and surcharge in gross tax revenue has nearly doubled to 19.9 per cent in FY21, from 10.4 per cent in FY12.

This has resulted in the decline in the central transfer to states, including non-finance commission transfers. Such transfers from the Centre to states has declined to 48.6 per cent in FY20 from 53.4 per cent in FY12, said a report by India Ratings.

The 15th Finance Commission has recommended a whopping 92.3 per cent increase in grants-in-aid to states during FY22-26 compared to the 14th Finance Commission. However, the increase in tax devolution is only 7.0 per cent, resulting in an overall 17.2 per cent year on year growth in transfers to states.

“The key reason for higher growth in grants-in-aid and lower growth in tax devolution is the increase in the proportion of central taxes being collected in the form of cess/surcharge, which are not part of tax devolution,” said the report.

It noted that while the Centre has accepted most of the proposals of the commission, two proposals on grants to states — eight specific sectors and state-specific grants — totalling Rs 1.79 lakh crore are under consideration.

The share of states’ in central taxes has declined for eight states – Andhra Pradesh, Assam, Karnataka, Kerala, Odisha, Tamil Nadu, Telangana and Uttar Pradesh. Karnataka faced the maximum decline. On the other hand, Maharashtra is the biggest gainer which witnessed an increase of 64 basis points in its share in central taxes, followed by Rajasthan, Arunachal Pradesh and Gujarat.

The report noted that the commission stated that there can be no formula-based horizontal devolution which can meet the needs of each of the 28 states, and recommended an allocation of 1.92 per cent of the gross revenue receipts of the union aggregating Rs 2.94 lakh crore as revenue deficit grants to 17 states during its award period of FY22-FY26.

These states are Andhra Pradesh, Assam, Haryana, Himachal Pradesh, Karnataka, Kerala, Manipur, Meghalaya, Mizoram, Nagaland, Punjab, Rajasthan, Sikkim, Tamil Nadu, Tripura, Uttarakhand and West Bengal.

Among others recommendations of the 15th Finance Commissions relate to grants for healthcare, local government, disaster management as also performance-based grants for power sector, agriculture and education.