Special Category status

Context: Bihar Cabinet passes resolution seeking special category status to State.

Benefits provided to Special category states:

• For Special Category States 90% of the Central assistance is given as grant and 10% as Loan. In the case of Non-Special Category States, however only 30% of NCA is given as grant and 70% as Loan.. 
• Tax sops  such as concession on Customs duty, income tax and corporate tax etc. for industrial development. 

However, since 2014, special category status was formally done away with. 

Reasons:

• Increased devolution: 14^th finance commission has increased the vertical devolution to states to 42% (from 32% during 13^th FC).
• Changed formula: Since 14^th finance commission has introduced factors like “Forest and ecology” in the formula for horizontal devolution, hilly and difficulty terrain states may receive increased devolution from the centre. 
• Other grants from Finance commission: Apart from the devolution from divisible pool of taxes, finance commission also recommends grants like Local body grants, Disaster management grants, Revenue deficit grants (for those states who incurs revenue deficit even after receiving horizontal devolution funds) and other grants in accordance with Terms of Reference given by the government to the commission. 
• Special support: Central government has been providing support to the states in the form of 
  • GST compensation for any tax revenue loss incurred to states for adopting GST mechanism.
  • 50 year Interest free loans to states for capital expenditure.

Arguments for Special category status:

• Socio-economic and infrastructural backwardness. E.g: Bihar.
• Loss of taxation rights to states under GST mechanism.
• Though the share of divisible pool of taxes to states increased, there has been no significant increase in effective devolution due to increase in the share of cess and decreasing tax rates. (Cess income do not form part of divisible pool of taxes and hence not mandated to share with the states). 
• Demographic composition: States like Bihar whose TFR is still higher than the national average, require support from the centre to take advantage of the demographic dividend. 

Though some states have genuine arguments for their demand for special category status, most of the demands are politically motivated. The sustainable solution for regionally balanced development is to improve Infrastructure creation, introduce marketing reforms in agriculture, efficient decentralisation for better governance.