CENTRE-STATE FISCAL RIFT IS BACK IN FOCUS

The recent transformation of India's flagship rural employment guarantee programme puts a greater financial burden on states, highlighting a long-running source of friction in their relationship with the Union government.

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By law, the Union government collects direct taxes and shares them with states. However, states say their share has not kept pace with the growth in tax revenues, even though they bear the bulk of social and development expenditure. States also argue that their autonomy is being eroded as the Union government asks them to co-finance centrally sponsored schemes (CSS) they may not have signed up for. Mint looks at what is straining the financial relations between the Centre and states:

PENALISING SUCCESS

UNDER THE Constitution, only the Union government can collect direct taxes, with the Finance Commission (FC) setting the terms under which it is shared with states. FC recommendations are revised every five years. Under the 15th FC (2021 to 2026), the Union government is supposed to share 41% of the taxes it collects with states. Goods and services tax (GST) is shared through a different set of rules. However, the share of states in total taxes has hovered around 33%.

This is a key grievance of many states, especially the more affluent southern ones. They argue that despite contributing a higher share of taxes to the Union government, they are effectively penalised in favour of poorer states. This grievance has been amplified in recent years as the Union government's retained tax revenue has been growing faster than the share it passes on to the states. The main reason for this is the Union government's greater use of cesses and surcharges on income and corporate tax.

CESS CHESS