CESS, SURCHARGE SHARE DOUBLES TO 19.9% IN FY21: INDIA RATINGS

The share of cesses and surcharges in the gross tax revenue of the Centre has nearly doubled to 19.9% in 2020-21 from 10.4% in 2011-12, leading to the 15th Finance Commission to recommend a higher grant-in-aid and lower tax devolution to the states, according to a report.

Under the existing Finance Commission (FC) framework, the cesses and surcharges collected by the Centre are not part of the tax devolution.

And, the massive spike in the same has forced the FC to suggest higher grant-in-aid to the states to compensate for the low growth in tax devolution which is pegged at 41% during the operation of the 15th FC award, India Ratings said on Tuesday in the report.

The key reason for higher growth in grants-in-aid and lower growth in tax devolution to the states is the increase in the proportion of the central cess and surcharges as they are not part of the tax devolution to the states, said the agency’s principal economist Sunil Sinha.

As a result, the transfer from the Centre to the states including non-finance commission transfers declined to 48.6% in 2019-20 from 53.4% in 2011-12, he said.

The the Centre is yet to accept the proposals on grants to the states totalling ₹1.8 lakh crore, said the report.

According to the latest FC award, the share in central taxes has declined for eight states. Andhra Pradesh saw a decrease of 35 basis points (bps) to 4.05%, Assam by 24 bps to 3.13%, Karnataka by 118 bps to 3.64%, and Kerala by 60 bps to 1.93%, it added.

Odisha saw a decline of 22 bps to 4.53%, Tamil Nadu by just 2 bps to 4.08%, Telangana by a sharp 40 bps to 2.1%, and Uttar Pradesh by 27 bps to 17.94%.

This makes Karnataka the biggest loser with of a loss of 118 bps, followed by Kerala losing 60 bps of the share and Telangana by losing 40 bps, the report said.

The biggest gainer was Maharashtra with an increase of 64 bps to 6.32% share in central taxes, followed by Rajasthan 38 bps to 6.03%, Arunachal Pradesh 33 bps to 1.76%, and Gujarat gaining 31 bps to 3.48% share, it added.

The report has recommended a whopping 92.3% rise in grantsin-aid to the states during award period of FY22-FY26 over the 14th FC report.

But, the increase in tax devolution is only 7%, or an overall 17.2% growth in transfers to the states.