Context: Over the last decade, States have been relying more and more on transfers and grants from the Centre. The falling efficiency of States in collecting more taxes has deepened their dependency on the Centre.
Relevance of the Topic:Prelims: States’ sources of revenue- Key Facts, Trends Analysis.
What are the sources of Revenue for States?
1. States’ share of Central Taxes:
- According to the Constitution, the Union Government is required to share a part of all the tax revenue that it raises with State Governments.
- This part of the tax collection that the Central Government shares with State Governments is known as the States’ Share in Central Taxes.
2. States’ Own Tax Revenue (OTR):
- There are many taxes that are either levied by State Governments, or where the collection goes directly to State Governments.
- Except Goods and Services Tax (GST), the rates of such taxes are determined by State Governments. Hence, there is a variance across States.
- Goods and Services Tax (GST):
- Components of the total GST collection, known as State GST (SGST) and part of integrated GST (IGST) goes directly to State Governments.
- State Excise Duty:
- Levied on the production of goods that are not under GST.
- After the introduction of GST, the main item on which State excise duty is applied is alcohol.
- Sales tax and VAT:
- There are certain items whose sale is not covered by GST.
- The sale of such items falls under the State sales tax or State value added tax (VAT).
- Stamps and Registration Duty:
- This is generally levied on the sale of land and/or immovable properties such as flats/houses/buildings.
- Vehicle Registration Tax:
- Applied on the registration of new vehicles or in the case of a change in the ownership of a vehicle.
- Entertainment Tax:
- This levy is generally applied on the sale of movie tickets, etc.
3. States’ Non-Tax Revenue:
- Lease/sale of natural resources:
- States can either sell or lease out natural resources for the economic purposes for which they receive receipts.
- Lease of minerals is a major source for many states, such as Odisha, Jharkhand and Chhattisgarh, among others.
- Economic services:
- There are certain services provided by the government for which it charges the user, such as - irrigation, health, education, forestry and wildlife, etc.
- The user charges are not done with the purpose of profit, and are generally much lower than the charges by the private sector.
- Nonetheless, they do provide some revenue to the government.
- Sale of lotteries:
- Some states engage in the activity of selling lotteries
- The net proceeds from these goes to the government funds.
- Interest receipts:
- State governments can provide loans to certain entities like public sector undertakings (PSUs), local bodies, etc.
- Interest receipts are the interest received on such loans.
Trends of States’ revenue share among different sources
- Increasing share of Transfers from Centre:
- In the last decade (FY16 to FY25), 23-30% of the total revenue of States was collected from the Centre as transfers.
- However, in the 2000s and 2010-15, the share was 20-24%.
- Increasing share of Grants from Centre in States’ non-tax revenue:
- 65-70% of the non-tax revenue of States was collected from the Centre as grants in the last decade.
- In the 2000s and 2010-15, the share was lower at 55-65%.
- Diminishing share of non-tax revenue:
- Revenue from non-tax revenue, other than Central grants, has been diminishing. This share is likely to go below the 24% mark in FY25 for the first time in the past 25 years.
- Interest receipts have not exceeded 5% of non-tax revenues in the last decade.
- Compared to the 2000s and first half of 2010, when it formed 5-9% of non-tax revenue.
- The share of dividends and profits garnered from State public sector enterprises has remained under 1%.
- Stagnant Own Tax Revenue:
- States have also not done enough to efficiently collect taxes to increase their own tax revenue.
- For over a decade now, States’ own tax revenue as a share of their total revenue has remained considerably below 50%.
- In the 2000s and in the early 2010s, it had crossed the 50% mark for many years or remained close to it.
- SGST-driven Own-Tax Revenue:
- While SGST accounted for 15% of the States’ total revenue in FY18, it currently makes up about 22%.
- Consequently, the share of own tax revenue, without the contribution from SGST, has declined from 34% to 28%.
- What it implies: Share of States’ own tax revenue is not only consistently below the 50% mark, but also an increasing share of it is derived from SGST.
- A marked decline in ratio of select States’ own tax revenue to its GSDP:
- For Tamil Nadu, the own tax revenue to GSDP ratio has gradually declined from 7.72% in FY13-15 to 6.17% in FY 22-24. This has also been the case in Karnataka, Kerala, Bihar, Delhi, and Madhya Pradesh, too.
- While the ratio has risen in Maharashtra, Manipur, Meghalaya, Odisha, and Uttarakhand, it has remained stagnant in other States.
Concerns
- The combination of these factors indicates increasing dependency of States on Central funds.
- The Centre is playing a major role in the revenue earned by the States.
- However, it is also true that many States are not efficiently collecting taxes using avenues at their disposal.
- While expenditure responsibilities have been rapidly spiralling, the nearly stagnant own tax revenue mobilisation impedes the States’ counter-cyclical expansionary fiscal measures in a sustained manner to boost aggregate demand in the economy.