Financial Daily from THE HINDU group of publications
Thursday, Feb 03, 2005
Industry & Economy - Taxation
States to get 30 pc share in Central taxes
The Finance Minister, Mr P. Chidambaram, flanked by the Minister for IT and Communications, Mr Dayanidhi Maran, and the Minister for Power, Mr P.M. Sayeed, addressing a press conference in the Capital on Wednesday. Kamal Narang
New Delhi , Feb. 2
STATE governments would be entitled to a 30.5 per cent share of the proceeds from all Central taxes and duties with effect from the coming fiscal. This is as against their existing entitlement of 29.5 per cent.
The Union Cabinet on Wednesday approved the Twelfth Finance Commission's (TFC) recommendation to devolve 30.5 per cent of the net proceeds of all shareable Central taxes and duties to States during the five-year period from 2005-06 to 2009-10. The move to confer an additional one percentage point share in Central taxes would boost the States' annual revenues by roughly Rs 3,000 crore at existing collection levels.
Currently, as per the Eleventh Finance Commission's formula for the period from 2000-01 to 2004-05, States receive 28 per cent of the net proceeds of all shareable taxes and duties (which includes revenues from corporation tax, personal income tax, Union excise, customs duties, service tax but not from surcharges or various cesses).
Besides, they are given an additional 1.5 per cent share in lieu of their not levying and collecting sales tax on sugar, textiles and tobacco products, on which the Centre charges an additional excise duty (AED). This takes the total existing share of States in net proceeds of all shareable Central taxes and duties to 29.5 per cent.
"We have accepted the TFC's recommendation to increase the States' overall share from 29.5 per cent to 30.5 per cent. The increase in linked to the AED levy on the three items remaining with the Centre. When the power to tax the three items are passed to the States, their overall share in Central taxes and duties will revert to 29.5 per cent," the Finance Minister, Mr P. Chidambaram, told presspersons after the Cabinet meeting here.
He claimed that the share of States in Central taxes and duties in absolute terms over the ensuing five-year period would aggregate Rs 6,13,112 crore. In addition, States would receive Rs 1,42,639 crore as grants-in-aid over this period, including Rs 16,000 crore for calamity relief, Rs 25,000 crore for local bodies, Rs 15,000 crore for maintenance of roads and bridges and Rs 56,000 crore for covering their non-Plan revenue deficits.
The other major recommendation of the TFC that was endorsed by the Cabinet was to consolidate all past Central loans taken by the States till March 31, 2004, and re-fix the interest on these to 7.5 per cent, along with a uniform tenor of 20 years. The outstanding loans and advances from the Centre to States as on March 31, 2004, are estimated at around Rs 2,15,000 crore, of which over Rs 1,14,000 crore represent loans bearing 13 per cent interest covered under the debt-swap scheme. States will now be able to reduce their interest outgo on the balance amount of about Rs 1,00,000 crore as well.
"States will gain through interest relief as well as principal repayment rescheduling. Currently, the average interest rate on Central loans stands at around 9 per cent," Mr Chidambaram said. Further, he added that all Central assistance to States henceforth would be made as grants and "no part of our transfers will take the form of loans."
In case States need to mobilise additional resources, they can do so through market borrowings so long as they adhere to the requirements of Central clearance under Article 293 of the Constitution. The Cabinet also accepted the TFC's recommendation regarding debt write-off for States, with this being linked to their adhering to prescribed parameters, including enactment of fiscal responsibility legislations.
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