If Cesses, Surcharges Included Devolution to States Could Have Gone up to 40 PC

Chennai: If the cesses and surcharges were included in the divisible pool of central taxes, the tax devolution to states would have gone up from 35.5 per cent to 40 per cent in FY25, finds India Ratings.

Apart from various taxes, the reliance of the union government on cesses and surcharges has increased in recent years. The total cesses and surcharges, excluding GST compensation cess, collected by the union government have been budgeted at 10.2 per cent of the gross tax revenue in FY25BE.

As cesses and surcharges are not part of the divisible pool of the union government as per the Article 270 of the Indian constitution, states feel deprived off of their legitimate revenue.

In FY25, the union government has budgeted to share 35.5 per cent of the divisible tax pool with states, lower than 41 per cent recommended by 15th Finance Commission. Furthermore, the states’ share in central taxes has been trending downwards. The share of states averaged 35.4 per cent of the divisible pool during FY21-FY25BE, down from 39.8 per cent during FY16-FY20.

As states are responsible for over 60 per cent of general government expenditure, lower than the recommended level share of states in central taxes coupled with cess and surcharges, will remain an important issue before the 16th FC. “Had the cesses and surcharges, excluding GST compensation cess, been included in the divisible pool of taxes, then states would have received roughly 4.2 per cent more, thereby taking the tax devolution to states to nearly 40 per cent in FY25,” said Paras Jasrai, Senior Analyst, Ind-Ra.

The government has been turning the revenue expenditure levels back to the pre-pandemic levels in the past few years, and intends to continue with that trend in FY25. The revenue expenditure as a percentage of GDP has been budgeted at 11.2 per cent in FY25, which is the lowest since FY19.