The Hindu : Business : Include Central cess in divisible pool: study

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Include Central cess in divisible pool: study

K. Venkiteswaran

States seek substantial rise in share of Central taxes

’Effective corporate tax rate is 20.6 per cent’
Shortfall in Centre’s revenue mobilisation

KOCHI: A study on the recommendations of the Finance Commission by the Kochi-based Centre for Socio-Economic and Environmental Studies has recommended that Central government cess and surcharge should be included in the divisible pool so as to benefit the States also.

The study noted that the Twelfth Finance Commission (TFC) had stepped up the States’ share in total Central taxes marginally, to 30.5 per cent from the 29.5 per cent despite the strong plea made by all States to raise their share substantially.

But in 2005-06 and 2006-07, the first two years of the award of the TFC, the share of the States (25.8 per cent and 25.4 per cent) fell short of even the stipulated share. The exclusion of cess and surcharge from the sharable pool of Central taxes and the increasing resort to these means by the Central government are the major reasons for this shortfall, the study said.

It found that the share of cess and surcharge had been increasing in recent years. The study therefore recommends that the 13th Finance Commission should make cess and surcharge part of the divisible pool.

The TFC had suggested capping of the overall revenue transfers to States from the Centre’s gross revenue at 38 per cent, an increase of just half a per cent from the share stipulated by the Eleventh Finance Commission. There is no need for fixing the maximum for Central revenue transfers as there is no corresponding minimum fixed for such transfers, it was pointed out.

Secondly, the ceiling of 38 per cent proposed by the TFC was much lower than the actual States’ share during the first five years of the nineties covered by the Ninth Finance Commission’s award.

The Finance Commissions had ‘disciplining’ the States by limiting the grants to meet the deficits of the States in their non-plan revenue account. But there is no such regulation in the case of the Central government, the study said.

There had been considerable shortfall in actual revenue mobilisation by the Centre from what was envisaged by the Finance Commission in its estimates. The States lost heavily as a result of this, it said.

The Thirteenth Finance Commission should take note of the Centre granting tax concession to corporates. According to the statement of ‘revenue forgone,’ tabled along with the Budget documents of 2007-08, the provisional tax expenditure in 2005-06 was estimated to be Rs.2,06,700 crore.

For 2006-07, the estimate is still higher at Rs.2,35,191 crore. Some studies had shown that the effective corporate tax rate is only 20.6 per cent as against the statutory tax rate of 33.66 per cent, study noted.

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