Tag: central taxes

Modi Tried to Surreptitiously Cut States’ Share of Central Taxes in 2014: Report

The prime minister reportedly had to back off because the then head of the Finance Commission, Y.V. Reddy, resisted.

New Delhi: Soon after he came to power in 2014, Prime Minister Narendra Modi tried to significantly cut states’ access to funds using backdoor negotiations with the Finance Commission of India, a new exposé from The Reporters’ Collective published in Al Jazeera has found. However, Modi had to back off because the then head of the commission, Y.V. Reddy, resisted.

“The Finance Commission’s firm stance forced the Modi government to hastily redo its maiden full budget in 48 hours and slash funding across welfare programmes since its assumption of retaining a greater portion of the central taxes did not pan out,” Al Jazeera‘s report notes.

B.V.R. Subrahmanyam, CEO of the Modi government-created government think-tank NITI Aayog, revealed this back-and-forth at a talk organised by the Centre for Social and Economic Progress last year. He said in that talk that Union government budgets are “covered in layers and layers of attempt to cover the truth”. He added that he was “sure you will have a Hindenburg who will open up the [Indian government’s] accounts if they are transparent”.

The video of this talk was available on YouTube, but was pulled down soon after The Reporters’ Collective sent a questionnaire on the subject to the Prime Minister’s Office. The journalists independently verified these claims using documents and the budget.

Al Jazeera reports:

“In its report that it submitted in December 2014, the commission recommended that states should get 42 percent of the share of central taxes, up from the 32 percent they had been receiving until then. But Modi, now the prime minister, and his Ministry of Finance, wanted to keep the states’ share of taxes down at 33 percent and a larger portion for the federal government.

Under the constitutional provisions, the government has only two options: accept the Finance Commission’s recommendations or reject them and establish a new commission. It cannot argue, debate or negotiate with it formally or informally.

But the prime minister tried off-record parleys to get the chairman of the Finance Commission, YV Reddy, who was earlier the governor of the Reserve Bank of India, to pare down his recommendations on the revenue share. In his comments on the panel, Subrahmanyam said he was the only other person in that conversation.

This was in breach of constitutional propriety. If the government had succeeded, it would be able to reduce the states’ income while passing the blame onto the constitutional body, the commission.

Subrahmanyam said that a “tripartite discussion between Dr Reddy, me and the prime minister” about the figure took place.

“No Finance Ministry [official or minister],” he stressed, was involved. “Should it be 42 [percent] or 32 [percent] or some number in between? The previous number was 32,” he said, referring to the percentage share of taxes recommended by the 13th Finance Commission.

The conversation lasted two hours, Sabrahmanyam said, but Reddy was unyielding. Subrahmanyam recalled Reddy, telling him in “good south Indian English: ‘Appa [Brother], go and tell your boss [the prime minister] that he has no choice’.”

The government had to accept the Finance Commission’s recommendations of 42 percent.”

Despite these failed backdoor negotiations, Modi hid from parliament that he had tried to reduce states’ share of taxes. He said in parliament on February 27, 2015, “To strengthen the nation, we have to strengthen the states… There is a dispute among Finance Commission members. We could have taken advantage of that. We didn’t. But it is our commitment that states should be enriched, should be strengthened. We gave them 42 percent devolution.”

Hit Hardest by the Pandemic, What Can the Common Man Expect from the Union Budget?

While some direct relief may be on the cards, it is unlikely to be huge, considering the government has its own set of macroeconomic challenges, in wake of COVID-19 pandemic.

In India, the Union budget is a televised affair, with specific announcements designed for political optics and how they will be played up on the front pages of newspapers the next morning.

One wonders whether even one of the numerous announcements made on Budget day brings any excitement for the common man – an employee working in the informal sector, a millennial graduate who is looking for a new job, or a retired employee.

Indeed, the excitement is reserved for all analysts who are immersed in number crunching and hastily preparing reports to be delivered to their clients. Businessmen fall somewhere in the middle, with their eyes only on specific announcements.

Also read: Analysis: Making Virus Crisis Budget, India Needs to Spend but Funds May Fall Short

The forthcoming Budget is to be announced after the Indian economy and its citizens have been roiled by the COVID-19 pandemic, with the lingering concerns of the pandemic still prevailing amidst the roll-out of the vaccine.

While obviously important, the common person is not interested in the government’s fiscal deficit numbers, its estimates of the country’s national income, disinvestments, capital expenditure and market borrowings programmes. What matters are purely tax-saving announcements and price pressures via tax hikes.

Let’s simplify things for the common man as to what one can expect from this year’s Budget.

What’s on the cards? 

Firstly, media reports indicate that a COVID cess may be on the cards. A cess is a tax with specific purposes and time duration, and the COVID cess will likely be announced to garner revenues for spending on vaccination. This is likely to pinch the pockets of the consumers as it will be applicable on all purchases.

FILE PHOTO: Finance minister Nirmala Sitharaman holds budget papers as she leaves her office to present the federal budget in the parliament in New Delhi, February 1, 2020. Photo: Reuters/Anushree Fadnavis/File photo

Secondly, import duties on some commodities, especially finished commodities, like electronic goods, furniture, and electric vehicles, are likely to be hiked under the broad theme of pushing for local manufacturing. Here again, consumers who are likely to incur such discretionary spending could have to shell out more.

Third and fourth are the most important things which the common man looks out for – tax exemptions and deductions. These are extremely important as individuals have faced the wrath of the pandemic in the form of job losses and pay cuts which has reduced the purchasing power.

At the same time, the revenues of the government have been strained owing to the nation-wide lockdown, which stopped economic activities, and this further act as an obstacle to announce tax relief measures.

In the previous Budget, the finance minister had allowed the individuals to choose between two tax regimes with the newer one offering lower taxes amidst no investment deductions. Although this added to the complexity in an already prevailing labyrinth of the income tax, individuals will expect easier relief measures like – increase in the income tax exemption limit from the current Rs 2.5 lakh to Rs 5 lakh, increase in the standard deduction from the prevailing Rs 50,000 to Rs 75,000 or hike in the popular 80C deduction limit. Nonetheless, any tax relief measures will be in the form of a token rather than with an objective to propel disposable income.

Also read: Budget 2021: Nirmala Sitharaman’s ‘Stress Test’ and Macroeconomic Challenges Ahead

The fifth aspect is the relief measures for the senior citizens, who are already earning meagre returns from their deposits. Barring some tax breaks on the interest income from the Senior Citizen Savings Scheme, it is highly unlikely that any specific tax exemptions will be announced.

Sixth, jobs – a graduating millennial and many unemployed individuals will lookout for a job scheme in urban areas akin to the rural job guarantee scheme of Mahatma Gandhi Employment Guarantee Act (MGNREGA), which witnessed a sharp increase in allocation during the pandemic.

A recent Centre for Monitoring Indian Economy (CMIE) survey highlights the fall in the per capita urban household income was sharper than the rural household and incomes have still not touched the pre-pandemic levels. This is worrisome and therefore expectations will be high on this front.

However, there have been some announcements already made by the government. In November, there was subsidy support in the form of provident fund payments to companies to boost employment and this can be extended from its current deadline of June 2021.

The government will also focus on infrastructure spending, which has positive externalities of job creation, but this is not what the common man will note because of the skilled-unskilled demand-supply mismatch.

Seventh is cash transfer that is unlikely to be announced barring the pre-existing transfers to the farmers, which could see a gradual hike. Lastly, the 130 crore population will also be hopeful of free vaccination against COVID-19 with the burden being shared by both Central and state governments.

Just before any Budget, the hype is understandable and the common man also joins the bandwagon of expectations from various interest groups. Given the prevailing challenges at the individual level, expectations of easing tax burden, transfers, more disposable income, jobs will be sky-high, but the same will have to be moderated by individuals as the government is constrained with its own set of macroeconomic challenges.

Sushant Hede is an associate economist at CARE Ratings Limited. 

‘Why Penalise a Performing State?’: KTR Criticises Finance Commission Recommendations

Telangana’s minister for IT also reminded the Centre to deliver on its legal commitments and ensure that the GST compensation is paid.

Mumbai: Telangana minister K.T. Rama Rao on Friday hit out at the N.K. Singh-headed 15th Finance Commission’s recommendation to decrease devolution, terming it as “penalising, disincentivising and demotivating” for well-performing southern states.

The state’s minister for IT also reminded the Centre to deliver on its legal commitments and ensure that the GST compensation is paid.

The reduction in devolution to 41% from the earlier 42% will lead to an up to Rs 4,000 crore hit to Telangana, Rao told reporters on the sidelines of the NTLF here.

“Why do you want to penalise a performing state and bring down our devolution from 42% to 41%? This is disincentivising and demotivating, he said.

Rao added that all the southern states have “suffered” despite delivering well on human development indicators like literacy and healthcare.

When asked about the options before the state to tide over the difficulties, he declined to comment on the strategy forward but added that the recommendations have happened despite several consultations with the Commission.

On the GST compensation payment, he said the 14%revenue compensation is embodied in the Act and is a commitment made by the Union while passing the law.

“We didn’t go to a court of law, but we demanded the GST compensation be paid. Hopefully, the Government of India will pay in the second tranche because the first tranche has been paid. We demanded and protested in Parliament. Hopefully, they will pay,” he said.

Rao, whose father K. Chandrashekhar Rao is the chief minister of the state, also pitched for a leeway in fiscal responsibility targets for well-performing states.

“We should be given more leeway. Right now it (fiscal deficit) is about 3.5% for Telangana, it should be 5%,” he said.

We want it to be increased and we be allowed to borrow more. you can stipulate a condition that whatever you borrow, you have to put it in the productive sector. Don’t spend it on freebies, we are ready to do that, he said.

He also alleged that the Union finance ministry’s department of economic affairs does not allow the states to borrow directly from foreign investors, and underlined that the Union government should be playing the role of enabler for states.

He also claimed that the Centre did not support Telangana’s scheme for having two parks dedicated to the pharmaceutical and the textile sectors.

Rao rued that the congruence between states and the Centre is missing and warned that goals like $5 trillion economy will be difficult to achieve sans that.

He also questioned the need to have sectors like education, healthcare and agriculture in the concurrent list, demanding that states should be given the leeway to decide for themselves on such aspects where local factors play an important role.

The minister said we need to focus on infrastructure, innovation and inclusive growth to achieve economic growth, and urged the Centre to emulate efforts undertaken Telangana in these areas.

He also sought for regulatory changes to ensure that Indian pension money needs to be invested to create infrastructure, just like how overseas money from Canadian pensioners gets invested here.

Rao urged the tech world to develop solutions for the real sector, making it clear that innovations have no use if they can’t be used for changing local peoples’ lives.

He also said that the state wants to create two varsities dedicated for pharmaceuticals and aerospace.

How Believable are the Modi Govt’s Tax Revenue Projections for FY’21?

To achieve the budget estimates for FY’21, central taxes may need an annual growth rate of close to 30%, which based on past numbers is highly unlikely.

Taxes are the biggest source of revenue for the Indian government. In 2017-18, out of the combined Centre-state estimated expenditure of Rs 48.6 lakh crore, about Rs 30 lakh crore (62%) was to be financed through tax revenue. And, out of all taxes that the governments (Centre and state combined) are able to raise, about 63%-64% comes from central taxes.

Part of the revenue raised from central taxes are used by the Union government to finance its own programmes, but a substantial part of central tax revenue, 42% to be exact, is transferred to the states (known as the divisible pool of central taxes), which states use for their own programmes.

Some central taxes, most notably cesses and surcharges, are not part of the divisible pool. As such, revenue raised from the central taxes is crucial not only for the financing of the Central government’s schemes, but also for that of the state governments. Moreover, the tax revenue raised can be used for the counter-cyclical policies by the government, which is the need of the hour given the slowing economic growth. Because of these reasons, tax revenue numbers presented in the budget are always looked forward with great interest.

In the Union Budget 2020-21, the central tax revenue for the financial year (FY) 2020-21 is estimated to grow at a healthy 12% annual growth rate. However, the budget also notes that the revised estimate (RE) for tax revenue collection for FY 2019-20 is Rs 21,63,423 crore against the budget estimates (BE) of Rs 24,61,194 crore – a shortfall of Rs 2,97,772 crore, or about 12%. This confirmation about less than estimated tax revenue collection has been manifesting in various forms over the last few months, such as spending cuts to curb deficit, non-payment or delayed payment by the government, higher borrowing than estimated and lower transfer to states.

Such a mismatch between budget estimates and revised estimates/actuals are not necessarily a new phenomenon, as can be seen from the following figures, which provide the gap between budget estimates and revised estimates/actuals of the tax revenue in the Union Budget for the last 10 years. Negative numbers in the following figure indicate that RE/A numbers were lower than BE, and vice versa.

Source: Compiled by author from Union Budget Documents, various years

 

Source: Compiled by author from Union Budget Documents, various years

Essentially, budget estimates of revenue collection are expectations about the future, and there are a number of factors that can affect tax collection, such as economic growth and international trade. Some occasional random events such as drastic fall in the international price of crude oil can also affect the tax collection as it happened in 2015-16 and 2016-17, when the Union government increased the taxes on petroleum products and received a windfall revenue gain. This large gain in tax revenue resulted in actual collection being higher than estimates. Because of variations in the factors which determine the tax collection, a certain degree of deviation in tax revenue from budget estimates is to be expected.

However, the last two years are different from previous years on two counts:

1) The gap between revised estimates and actuals for FY 2018-19 was 7.5%, while in the earlier periods, the revised estimates have deviated from the actual numbers by the margin of 1% to 2% only.

2) The large gap of 12% in 2019-20, even when the budget was presented in June due to the 2019 general elections, as opposed to February in regular years. This late budget provided data for four more months than usual, yet the estimates were off the mark by a wide margin.

Also Read: How Many People Will Benefit From Nirmala Sitharaman’s New Income Tax Rates?

Part of the large shortfall in tax revenue in 2019-20 is due to the corporate tax rate cut which was done in September 2019, after the budget was presented in June. However, even the tax base excluding corporate tax has seen the shortfall of more than 8%. Some commentators have argued that this increased gap between budget estimates and revised estimates/actuals could be due to the budget date being shifted from February 28 to February 1 in 2017-18. Because of this advancement of date, the government has to make estimates based on comparatively fewer/older data. However, this can only explain the gap for FY 2018-19, and not for FY 2019-20 when the Budget was presented in June.

Another argument has been that the government is not utilising the latest data available for the Budget. This does seem to be the case, at least partially, because the numbers presented in the 2019-20 and 2020-21 Union Budgets are certainly not in line with the tax revenue data presented by Controller General of Accounts (CGA), which is the actual data for government finances up to last month.

For example, the RE number for FY 2019-20 given in the Union Budget 2020-21 for the Centre’s share in central tax collection is Rs 15,04,587 crore; while according to the CGA’s website, the tax collection till the end of December 2019 is Rs 9,04,944 crore, or only about 60% of the RE. And, while it is true that January-March quarter see the largest tax revenue collection, numbers from previous years are show that till December 2018, 71.1% of the revenue was collected.

Source: Data taken from CGA’s website. The numbers are based on actual collection for 2018-19. The website gives a YTD number for 2018-19, but used the base of BE numbers for calculation, hence both are not comparable.

Note: This figure shows for the share of tax collection through months. To calculate the share, the base taken for FY 2018-19 is actual year end collection, while for FY 2019-20, the base taken is RE numbers in Union Budget 2020-21.

In fact, the CGA website shows that actual tax collection till December in FY 2019-20 is Rs 9,04,944 crore compare to Rs 9,36,333 crore in FY 2018-19. In other words, the actuals tax collections are not only lower than BE and RE numbers of FY 2019-20, but lower than even the actual collection of the previous year. Extrapolating the ratio (tax collected till December/tax collected in full financial year) from FY 2018-29, the gross central tax collection in FY 2019-20 would be about Rs 18,30,143 crore as opposed to RE of Rs 21,63,423 crore.

This essentially means that the actual collection for gross central taxes in FY 2019-20 is likely to fall short of about another Rs 3,00,000 crore compared to estimates given in the Union Budget 2020-21. And to achieve the BE numbers for FY 2020-21, the central taxes will need an annual growth rate of close to 30%, which based on past numbers is highly unlikely.

Suraj Jaiswal works with Centre for Budget and Governance Accountability (CBGA), New Delhi. He can be reached at suraj@cbgaindia.org. Views expressed are personal.

A Challenge to the 15th Finance Commission’s Credibility

The Additional Terms of Reference were issued at the fag end, when the commission had presumably completed all required processes.

On July 29, the president of India issued an order extending the date of submission of the report of the 15th Finance Commission (FC) to November 30, 2019. The same order also includes one additional term of reference (AToR). The commission is required “to examine whether a separate mechanism for funding of defence and internal security ought to be set up and if so, how such a mechanism could be operationalised”.

Incidentally, consultative process and close examination of finances of both the levels of government provide the foundation of a finance commission’s recommendations. This is what has contributed to its high credibility and its image as an independent and non-partisan institution. The AToR is issued at the fag end when the commission has presumably completed all the above processes.

The ToR of an FC is constitutionally defined under Article 280: Distribution of the net proceeds of the  sharable taxes between the union and the states and allocation among the states; the principles that should govern grants in aid of revenues of the states out of the Consolidated Fund of India and later the 73rd and 74the amendment of the Constitution added the measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and municipalities on the basis of the recommendations of state FCs. However, under 280 (d) the President may refer any other matter in the interests of sound finance.

Beginning from the first FC, additional issues were in fact referred to successive FCs. These reflected one or the other concerns relating to sound budget and fiscal management. The AToR which relates to protecting defence and internal security expenditures of the Union government does not fit in the framework of the constitutional provision, Article 280 (d).

Similarly, defence is in the Union list and therefore the responsibility of the Union government while internal security is largely the states’. Even when states requisition para military forces, they bear the expenses. It is not, therefore, an issue that should legitimately come under the domain of the FC.

Also read: The 15th Finance Commission May Split Open Demographic Fault Lines Between South and North India

In any case, the original ToR itself incorporates a consideration to have regards to, “The demand on the resources of the central government particularly on account of defence, internal security, infrastructure, railways, climate change, commitments towards administration of UTs without legislature and other committed expenditure and liabilities.”

There could be two reasons why this AToR is added at this stage. One, the defence expenditure declined from 2% of GDP in 2014-15 to 1.48% in 2018-19 and even lower at 1.45 % in 2019 -20 budget. Similarly, defence expenditure as a percentage of the government’s expenditure declined from 14.3% in 14-15 to 11% in 20i9-20. The other is that with the slowdown of the economy, it would be a challenge to even ensure this low level of allocation provided in the budget for 2019-20 while maintaining the fiscal deficit at 3.3%. Hence, the attempt to ring-fence the defence expenditure.

Having been referred to, what could the 15th FC do?

As noted earlier, the FC is already required to, under the original terms of reference, take into consideration the defence and internal security needs. While assessing the requirements of the Union government, the 15th FC should explicitly take into consideration the fact of the declining defence expenditure as a percentage of its total expenditure and make appropriate provisions in its expenditure projection.

The 15th FC could also recommend that the Union government reallocate expenditures wherever possible and eliminate wasteful expenditure. Further, it could suggest that the government mobilise more resources from sources such as the following: first, it should take measures to raise the tax-GDP ratio which has slumped to 11.7% in 2019-20 (Budget Estimates) as compared to 11.9% in the Revised Estimates to augment its resources to meet its expenditure requirements.

Second, it could minimise undisputed tax arrears which stood at around nine lakh crore at the end of 2017-18 and non-tax arrears of about 2 lakh crore in the same year. Similarly, the government could rationalise the tax incentives given to the corporate and non-corporate sectors – for the corporate sector alone, it was estimated at 1.39 lakh crore in 2018-19, which perhaps would decline following the recent policy decision if the corporate sector avails the lower rate of corporation tax, by giving up the incentives and exemptions they have been enjoying. Third, the Union government could monetise the huge chunk of government land under the ministry of defence, the railways etc., which the thirteenth commission, indeed, had recommended.

Also read: On Finance Commission Allocations, Modi Is So Far off the Mark, It Isn’t Even Funny

What should the 15th FC not be doing?

Over the years, the FC has established itself as a non-partisan institution of fairness and neutrality in which states repose a great deal of trust. It should not do anything that has an adverse impact on the divisible pool. In any case, the divisible pool is under significant stress. First, the 15th FC may not be able to increase states’ share beyond 42% that the 14th FC recommended.

Second, with a slowdown of the economy, the divisible pool would be adversely impacted. Third, with seven state taxes being subsumed in the GST, the states’ ability to mobilise resources from their own sources has been constrained. Fourth, the GST has yet to emerge as a buoyant tax.

On the contrary, CAG (Report no. 11 of 2019) noted that its yields declined by Rs one lakh crore in the revised budget of 2018-19 as compared to the original budget for 2018-19. It might further decline until the slowdown of the economy is reversed. States’ GST revenue with 14 % growth would be protected till 2022-13 but not for the entire award period of the 15th FC.

Fifth, cess and surcharges that are outside the divisible pool have increasingly become important instruments of revenue mobilisation. Just to illustrate, while the total transfer to states and UTs were Rs 4.1 lakh crore in 2017-18, revenue mobilisation by the central government through cess and surcharge stood at 3 lakh crore or 15.7 % of Centre’s gross tax revenue.

This went up to 5.12 lakh crore in 2019-20 (BE) accounting for 21.03% of the Centre’s gross revenue as against the total transfer to states and UTs to only 5.2 lakh crore in 2019-20 (BE). Last but not the least, even after rationalisation and restructuring of the centrally sponsored schemes, there remain 28 core schemes in which the general category states are required to contribute in 40% for their costs and three optional schemes requiring states to contribute 50%. Increasing states’ contribution to Core and optional schemes has clearly led to reducing states’ fiscal space and autonomy.

Also read: Debate: The Fifteenth Finance Commission is Vital for Economic Equality Within the Indian Union

For all these reasons, the 15th FC should deal with the AToR in a way that would have no adverse impact on the divisible pool which is already under great stress.

Atul Sarma is the chairman of the OKD Institute for Social Change and Development and was a member of the 13th Finance Commission.

Narendra Modi Must Stop Any 11th-Hour Attempt to Erode Fiscal Autonomy of States 

The centralising tendencies of the Fifteenth Finance Commission must be curbed.

When he was chief minister of Gujarat, Narendra Modi often vigorously argued for greater autonomy for states in terms of how they wanted to design their development programmes and spend their share of taxes. He even argued for state governments to be given the right to raise income tax. In short, he acted as a guardian angel of fiscal federalism.

But Narendra Modi as prime minister is behaving exactly the opposite. He now wants to centralise delivery of public goods to an extent that the states will be reduced to being mute implementing agencies for central programmes. Many states are deeply worried that a recent Presidential communication to the 15th Finance Commission has introduced a new term of reference at the eleventh hour, suggesting that a separate fund be carved out from the divisible pool of taxes and be specifically earmarked for internal security and defence related spending. 

States fear this is a red herring – and that the real purpose is to increase central discretion in use of funds.

This is unprecedented because so far all finance commissions have simply recommended a comprehensive formula to enable a portion of the divisible tax pool of taxes to be transferred to the states. Whatever the Centre retained would be used for central expenditure on national security, defence etc from the Consolidated Fund of India.

But seeking a special fund at the very last minute, that too after the Finance Commission has concluded its detailed consultations with all the states over the past few years, smacks of a unilateralism which has become a habit with this regime. The inherent suggestion that states must sacrifice part of their existing share of taxes (42% of the total pool) in the name of national security and defence may also indicate a certain desperation on the part of the Centre, which has clearly messed up its own fiscal balance sheet as was so evident in the recent Union budget numbers. Goods and Services Tax revenues not stabilising has added to the Centre’s anxiety.

Watch: With the Economy Sinking, Can the BJP Retain Its Political Hold?

Indeed, weak GST revenue growth, at least 15 to 20% below what was originally projected, clearly reflects a sharply slowing economy, among other things. The Centre has now painted itself into a corner and wants to take away some of the states’ share of taxes. What better way of making it happen than through a constitutional body like the Finance Commission. Like all institutions, this one too will be under pressure to deliver. 

In 2015, Modi government had accepted the key recommendation of the 14th finance commission to increase the states’ share of taxes from 32% to 42%. This may seem like a big increase but fiscal experts suggest the real increase was much less (about 3%) because the 14th finance commission also subsumed other discretionary plan and non-plan grants which were received by states earlier. So the net benefit to States was not so great. 

In fact, in a paper titled ‘New Approaches to Fiscal Federalism in India’, former RBI governor Y.V. Reddy, who was also chairman of the 14th Finance Commission, has argued the percentage share to states in the four years – 2015-16 to 2018-19 – may actually be lower than during 2011-12 to 2014-15. 

This needs to be examined and analysed more closely because the Centre is now seeking to take back some of the existing share of the states’ revenue on the ground that the 14th Finance Commission was too generous to the states. 

But as per Dr Reddy’s analysis, supported by many other fiscal experts, this is just not true. The net share of states may not have increased at all.

The Centre’s machinations go against the spirit of the Constitution because Finance Commission is a constitutional body and cannot be used as an instrument of fiscal coercion by the Centre. The Modi government created a controversy from the very start when it set a very regressive terms of reference for the 15th Finance Commission. Modi’s centralising tendency was very visible in the unusual terms of reference issued.

Also read: Federalism Is at the Heart of DMK’s Tryst With Jammu and Kashmir

As Reddy notes in his paper, “The terms of reference of the 15th Finance Commission invited unprecedented controversies. Traditionally, the core functions of the Finance Commissions included a reference to providing grants for the States which are in need of assistance. This has been deleted. States genuinely fear that in the absence of need based revenue deficit grant, discretionary powers will be conferred on the Union which is contrary to the intent of the constitution.”

Further, the former RBI governor notes: “For the first time a specific mandate has been given to review the recommendations of the previous Finance Commission”. This is totally unprecedented and this intent is also reflected in the eleventh hour mandate that a special fund be carved out for defence and national security imperatives. The aim is to reduce the overall share of the States in the divisible tax pool.

The most unusual component of the term of reference, also outlined by Dr Reddy, is that for the first time the finance commission has been officially mandated to consider the various development and welfare programs launched by Modi under the rubric of “New India 2022”.

This means funds transfer to the states could be tied to how they participate and spend in the Centre’s flagship schemes such as PM Awas Yojna, Ayushman Bharat, universal tap water delivery and so on. Modi has already announced these schemes and the central budget has so far provided minuscule amounts for these schemes. These schemes need massive funding for full implementation. 

It seems clear Modi wants to use the instrument of the finance commission to push his pet welfare and development programs, packaged as ‘New India 2022’. Without doubt this will reduce the autonomy of states to design their own schemes as per their need. States may be just reduced to being implementation agencies.

In political economy terms, all of Modi’s ‘New India’ schemes are largely targeted at the Hindi heartland states which are real laggards in development and social indices but have given the BJP roughly 50% vote share in 2019 Lok Sabha elections. The sufferers will be the better off states, especially the South, which may not feel as compelled to commit itself to Modi’s New India. There will be serious dissonance here both in political and constitutional terms. 

The recommendations of the 15th Finance Commission, to be released in November, will be keenly awaited by many states only to see how much of their fiscal freedom will be taken away by Modi’s centralising regime.  

‘Inadvertent Omission’ Denying Delhi Rs 6,500 Crore in Central Taxes: Kejriwal

In letter to Union ministers, the Delhi CM urges a return to pre-2000 mechanism of computation of UT shares and seeks Central grants for Delhi’s local bodies.

New Delhi: Delhi chief minister Arvind Kejriwal has in a letter to Union ministers Amit Shah and Nirmala Sitharaman pointed out an “inadvertent omission” of erstwhile Article 270(3) of the Constitution of India, under which the share of the net proceeds of income tax “attributable to the Union Territories” had to be prescribed. Due to this, he said, Delhi has been losing its “legitimate share” in Central taxes of nearly Rs 6,500 crore annually.

Stating that the omission took place when the Constitution (Eightieth Amendment) Act, 2000 was passed by parliament, Kejriwal has urged the Union home and finance ministers to rectify the anomaly so that Delhi gets its share.

In the letter, the Delhi CM noted that the Union Territory had a separate Consolidated Fund from December 1993. Thereafter, he said, the pattern of funding of Delhi’s budget changed from the year 1994-95 and came at par with other states.

“Till the year 2000,” Kejriwal wrote, “under the provisions of article 280(3)(a) read with the article 270 of the Constitution, the task of the Union Finance Commission with respect to income tax was to make recommendations in regard to three matters — the percentage of the “net distributable proceeds” which shall represent the proceeds attributable to the Union Territories; the percentage of the divisible pool of the “net proceeds” of income tax to be assigned to the States; and the share of each State in the divisible pool.”

Accordingly, he said, all the Union finance commissions till the Tenth Finance Commission gave recommendations for resource sharing not only between the states and the Union but also for the Union Territories, including Delhi.

Union budget 2019, higher education, Nirmala Sitharaman, Ministry of Human Resource Development, National Research Foundation, draft National Education Policy, K Kasturirangan, Department of Science and Technology, Department of Biotechnology, Council of Scientific and Industrial Research, Ministry of Earth Sciences, Rashtriya Shiksha Aayog, research funding, travel grants,

Finance minister Nirmala Sitharaman. Photo: PTI

Delhi lost its share following 80th amendment

However, Kejriwal, who is a former Indian Revenue Service officer, pointed out in the year 2000, the Constitution (Eightieth Amendment) Act, 2000 was passed by the parliament for including corporation tax along with personal income tax in resource sharing between the states and Union of India.

The amended Act replaced Article 270 with a new set of provisions. In the new Article 270, the erstwhile article 270(3), which had the enabling provision for the Finance Commissions to give recommendations in respect of Union Territories, was omitted.

Also Read: Will NDA’s Method of Disbursing Central Taxes Worsen Regional Fault Lines?

This omission, Kejriwal wrote, “appears to be an inadvertent error on the part of the Law Department, since the Statement of Objects and Reasons appended to the Constitution (Eighty-Ninth Amendment) Bill, 2000 does not mention a word about proposal to leave the Union Territories out of the ambit of the Finance Commissions. Even the debates in the Parliament on this Bill did not make any mention about deletion of Article 270(3).”

‘Delhi’s share in central taxes stagnant since 2000’

The “omission” of Article 270(3), the chief minister said, “resulted in an anomaly” which adversely affected Delhi’s finances. “The transfer of grants in lieu of share in Central taxes has remained stagnant at Rs. 325.00 crore per annum since the year 2000 which happened to be the last year of the duration of the Tenth Finance Commission,” Kejriwal pointed out.

He added that leaving Union Territories out of the ambit of Finance Commissions has only affected those with legislatures – like Delhi – since the budget of the other UTs is entirely met from the Consolidated Fund of India.

Referring to how various committees had proposed transfer of grants to UTs with legislatures in lieu of share in Central taxes, Kejriwal has written that as “one of the fastest growing metropolises”, the claims on Delhi’s resources are immense and varied. To maintain infrastructure that meets world standards, he said, the Delhi government is required to improve supply of civic amenities and large investments in education, health, social sector, food security, transport and roads.

However, the CM wrote that due to the omission of the Article 270(3), Delhi has been losing out on a “legitimate Share in Central taxes of at least Rs. 6,500 crore per annum with an appropriate annual enhancement, like other States, to finance the development needs.”

‘Delhi also denied funds for local bodies’

Kejriwal also wrote that Delhi has five urban local bodies, but they are not given the “basic and performance grants” as those in other states get. “The three municipal corporations of Delhi are under financial crunch and merit the same consideration from the Central government.”

Stating that his government “devolves funds to the local bodies, @12.5% of its net tax proceeds on the basis of recommendations of the Delhi Finance Commission,” he urged the Centre to also fund them.

“The Fourteenth Finance Commission allocated grant-in-aid of Rs. 2,87,436 crore for the local bodies for the award period 2015-2020 which works out to Rs. 488 per capita per annum,” he wrote, adding that by that ratio, “Delhi with population of 193.86 lakh should be provided at least Rs. 1150.00 crore with an appropriate annual enhancement as grant to local bodies.”

Will the 15th Finance Commission Give Delhi its Due on Central Taxes?

If the Centre can include Puducherry as a constituent of the FC-XV, why should Delhi not be treated similarly?

On May 17, finance ministers of five non-BJP states met President Ram Nath Kovind to discuss the terms of reference for the Fifteenth Finance Commission (FC-XV). They submitted a memorandum suggesting several amendments to the terms provided to the commission by the president earlier this year.

The finance commission is a constitutional body set up by the president every five years to determine the share of each state in central taxes. A large portion of this pool of funds is set aside for the use of the Central government, and the rest is distributed to the states.

The meeting with the president was a culmination of weeks of deliberations between the finance ministers of non-Bharatiya Janata Party (BJP) states since April. Initially, the debate was dominated by the fact that the use of the 2011 Census instead of the 1971 Census puts southern states at a serious disadvantage. But many other concerns have come up through these deliberations. The last point on the list of suggested amendments submitted to the president was specifically about Puducherry and Delhi, both of which are Union territories (UTs) with legislature.

It was suggested that a “suitable amendment be made in the TOR (terms of reference) to ensure that the award of Fifteenth Finance Commission must apply to UTs with legislature also.”

In the past, the terms have specified that the commission should consider the demands on resources of the Centre as well as states in the process of carrying out their respective functions. Union territories have not found any mention in these documents, because they were possibly considered an implied burden on the Centre. However, Delhi and Puducherry, both of which are UTs with legislature, have never been considered by any Finance Commission while determining the share in central taxes. In October last year, the Centre decided to treat Puducherry “at par with states” for the purpose of devolution of funds, but not Delhi.

Delhi chief minister Arvind Kejriwal with his deputy and finance minister Manish Sisodia. Credit: PTI

Delhi chief minister Arvind Kejriwal and his deputy and finance minister Manish Sisodia point out that Delhi pays as much as Rs 1.08 lakh crore or 13% of India’s entire direct tax collection. Credit: PTI Files

In fact, the terms of reference for FC-XV went one step further to exclude Delhi. Clause 3 of the terms have the following sub-clauses:

(ii) The demand on the resources of the Central Government particularly on account of defence, internal security, infrastructure, railways, climate change, commitments towards administration of UTs without legislature, and other committed expenditure and liabilities;

(iii) The demand on the resources of the State Governments, particularly on account of financing socioeconomic development and critical infrastructure, assets maintenance expenditure, balanced regional development and impact of the debt and liabilities of their public utilities;

On the one hand, sub-clause (ii) states that the commission shall consider the financial burden of administering UTs without legislature (Chandigarh, Lakshadweep, etc.), and on the other, sub-clause (iii) which deals with state governments, makes no mention of UTs with legislature.

What makes Delhi’s conundrum more pronounced is the manner in which the finance commission determines the distribution of funds to states for supporting local bodies. Chapter 9 of the FC-XIV report reveals that the commission used the State Finance Commission (SFC) reports to recommend the distribution of Rs 87,143 crore for urban local bodies. SFCs, like the Central Finance Commission, are also constitutionally mandated. Delhi has constituted its fifth SFC, but has been unable to fully implement the recommendations of the fourth SFC.

Despite Delhi being a UT with legislature, for the purpose of devolution of funds to its municipal bodies, it is considered a state. But when it comes to receiving its fair share of central taxes to foot the bill of the SFC’s recommendations, Delhi is neither a state nor a UT.

If the Centre can include Puducherry as a constituent of the FC-XV, why should Delhi not be treated similarly?

There needs to be a much larger legislative intervention to improve Delhi’s status. With the ongoing dispute between the Centre and Delhi government in the Supreme Court over the extent of powers enjoyed by the latter under the current constitutional scheme, it is unlikely that this BJP government may be keen on such interventions. However, there is one area where the two governments can reach common ground.

When the constitution was amended to introduce the Goods and Services Tax (GST), Article 246A clarified that the word ‘state’ would include ‘UTs with legislature’, for the purpose of that Article. A similar amendment can be made for all the articles that apply to the provisions in the constitution for distribution of taxes. If such an amendment is made, Delhi will have to be included in the award of the FC-XV. This will help the ruling BJP as well, since Delhi will have enough funds to implement the recommendations of the SFC, and BJP-ruled municipal bodies will benefit the most.

Central Bureau of Direct Taxes data shows Delhi pays as much as Rs 1.08 lakh crore or 13% of India’s entire direct tax collection and receives Rs 325 crore each year from the Centre. Contrary to perception, Delhi’s government does not run on central funds, despite being the capital city. In fact, Delhi contributes a disproportionate amount as central taxes that are actually used by other states.

There is obviously nothing wrong with Delhi’s tax money being used in other states, but isn’t it time Delhi gets its due?

Akshay Marathe is National Joint Secretary, Aam Aadmi Party. He works with the Delhi government on education policy.

Being a Tamil in a Post-Jayalalithaa World

The political vacuum in Tamil Nadu comes at a time when the divergence between the fundamental interests of the state and India are beginning to accelerate owing to demographic trends.

The political vacuum in Tamil Nadu comes at a time when the divergence between the fundamental interests of the state and India are beginning to accelerate owing to demographic trends.

A scene from Chennai's Marina Beach. Credit: Vinoth Chandar, Flickr, CC BY 2.0.

A scene from Chennai’s Marina Beach. Credit: Vinoth Chandar, Flickr, CC BY 2.0.

In September 2016, when chief minister J. Jayalalithaa was still in charge, Tamil Nadu was the only large state and AIADMK the only party in parliament to have opposed the GST on the grounds that it was an assault on states’ rights. Jayalalithaa was also the only chief minister to vociferously oppose the Fourteenth Finance Commission’s (FFC) formula and make it a poll issue. She won the elections. Tamil Nadu was one of the few states that opposed Ujwal DISCOM Assurance Yojana (UDAY), which Jayalalithaa described as an accounting trick that impeded states’ fiscal autonomy. Then there’s the National Food Security Act, which Tamil Nadu refused to roll out by calling it unjust.

In the time since, after Jayalalithaa fell ill and passed away, the Tamil Nadu government has either forgotten its opposition to or reversed its position on every one of these issues. Now, the AIADMK has gone silent on the GST. Even when faced with a deficit, the incumbent chief minister or finance minister have not raised the FFC’s formula as an issue in any serious way. The government has signed up for UDAY. Worse, the state that had one of the most generous and effective PDS systems has signed up for the inferior National Food Security Act.

Each of these decisions that the Tamil Nadu government has actively made or has passively acquiesced to gives up some of the state’s governing authority and fiscal space to Delhi. For all her faults, Jayalalithaa fought for states’ rights; she was consistent and forceful on the subject right from her days as a Rajya Sabha member in the 1980s.

The AIADMK party that she left behind, meanwhile, seems to have none of her passion for standing up to Delhi. Her reasons were often complicated: she tolerated absolutely no checks or balances and liked the spectacle of political grandstanding. But that’s the reason politicians exist in a democracy. In the months since her death, it has become apparent that the personal ambition of a politician isn’t as prohibitive to society when the likely alternative is abject incompetence and lack of principles.

M. Karunanidhi, a five-time former chief minister and one of the original stalwarts of states’ rights in India, too has suffered a health setback and hasn’t been seen in public for several months now. That’s a twin blow to the state that has had strong-willed, charismatic chief ministers who excelled in political slugfests when it came to dealing with Delhi. As if to confirm this worry about the loss of a champion in the Tamil corner, the Union minister for urban development M. Venkaiah Naidu reviewed projects from the state secretariat. Further, Naidu made a speech where he declared, “my cooperation depends on your operations, otherwise, there will be separation.” It is safe to assume no union minister would have even considered this comically inept attempt at grandstanding had Jayalalithaa or Karunanidhi been the chief minister.

To add insult to injury, the old language issue has been rekindled. It’s tiring that generation after generation the Tamils have to tell people and politicians from north India that Hindi isn’t India’s national language. Or that most Tamils don’t think it’s either necessary or useful to learn Hindi. Contrary to silly explanations that many are fond of giving, that learning Hindi improves one’s job prospects, the only job that Tamils have been denied because of a lack of fluency in Hindi is the job of prime minister of India.

Each of these issues, when taken in isolation, is a routine thorn in the flesh of a federal system. They can be reversed in a democratic setup by careful negotiation and policy shifts. But the political vacuum in Tamil Nadu comes at the most inopportune of times when the divergence between the fundamental interests of the state and India are beginning to accelerate owing demographic trends. This isn’t something that a different government in Delhi with a different policy prescription can solve easily; it’s a fundamentally zero sum game that Tamil Nadu and India are involved in.

India by virtue of being a democracy tries to aggressively re-distribute wealth to places that are more populous and are poorer. India, if the recent political discourse in central and northern parts of the country is any indicator, also incentivises populist politicians from more populous and culturally dominant regions to impose that culture/language on others as a political project. Thus, a high performing state that has achieved low fertility rate and happens to be culturally distinct, such as Tamil Nadu, ends up getting ‘punished’ in such a system. The FFC formula and rekindling language issues are exactly that.

The FFC, for instance, has already bruised Tamil Nadu quite severely for achieving high economic growth and a low population growth. The FFC has increased the weightage for population in the formula with which the Centre distributes its tax revenue among states. Thus states that have a higher fertility rate get rewarded at the expense of wealthier states that also have low fertility rates. Tamil Nadu was the most affected state in terms of loss of revenue calculated using this formula. The loss in revenue was estimated at  close to Rs 6,000 crore for 2016-17.

The other significant area where the rest of India is in direct conflict with Tamil Nadu is delimitation. Under Article 82, the electoral map of India is/was to be redrawn after every Census. In 1976 it was amended to freeze Lok Sabha constituencies – so that states that implement family planning policies well weren’t punished for their success. It’s been frozen till 2024; but one can be sure that when it ends, states in north India will want to have greater representation in the Lok Sabha given their populations have exploded in the past 40 years compared to Tamil Nadu’s.

The average Tamil woman now bears 1.7 children while her counterpart in Madhya Pradesh bears 3.2. So either India has to agree with north India’s democratic request of making the representation in Lok Sabha true to demographic reality or punish states with low TFR for their success. Tamil Nadu has achieved the maximum increase in relative representation per citizen in the past 40 years and thus has the most to lose: it has gained seven MPs in relative terms. This likely loss of representation per citizen is also a loss of ability to influence future outcomes, which will end up pushing Tamil Nadu down a spiral of having ever decreasing influence in decisions that Delhi makes.

The argument that those wedded to the idea of a nation state being sacrosanct put forward is: this happens in most large countries with a federal system. They cite the example of how in the US,  New York and California subsidise many of the states in Appalachia or the Deep South. But the fundamental difference between California and Tamil Nadu is that California gains population from the states it’s subsidising and therefore those states aren’t gaining political representation at the expense of California. In India, birth rate is still the primary driver of population growth; not migration. Thus UP/MP/Bihar/Rajasthan, states that have fertility rates well above replacement, aren’t losing population to Tamil Nadu like parts of the US are to CA/NY.

States in north and central India are growing their populations at a rapid pace still while Tamil Nadu has had a below replacement fertility rate for over a generation. Further, the American system has two senators per state in their powerful senate. The Rajya Sabha doesn’t have the power of veto to the extent that the American senate has, either. So the argument of citing other federal systems doesn’t hold as much water.

Fifty years ago, Tamil Nadu was no different from the rest of India. As of 2016, its indices in health, education and other social development metrics are comparable to OECD nations; the median values for rest of India in all these parameters skew towards the global south. So, in some ways, being part of India has worked for the state. But moving up and staying at the top require entirely different strategies in sport and in business. Does that apply to constituent parts of a nation state? That’s the question a Tamil is grappling with. After all, two of the most successful countries in the world right now, Norway and Sweden, were formed by dissolving their union in 1905.

Nilakantan R.S. works as a data scientist for a tech start-up and looks at politics from that vantage point.