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Fair distribution of GST proceeds between Centre and states

With India adopting the goods and services tax (GST), historical trends in revenue collections have ceased to be relevant to forecast future revenues, according to a National Institute of Public Finance and Policy (NIPFP) study, ‘Fiscal Implications of Introduction of Goods and Services Tax in India‘. The study, commissioned by the 15th Finance Commission, uses data from three sources that are not comparable to estimate GST revenues. The entire exercise shows how complex it is to construct a consistent and a comprehensive data set on GST revenues.

States worry that any reduction in transfers will curtail their spending power needed to discharge their constitutional responsibilities. Their worries cannot be brushed aside.

The kitty that will be available for transfers to states will depend on the assumptions underlying GDP growth, and revenue and expenditure projections for the next fiscal.

The 15th Finance Commission submitted its report for the coming fiscal to President Ram Nath Kovind recently. What it has recommended on the distribution of tax proceeds between the Centre and states should be known in the Budget session. Has it suggested reduced transfers to states from the Centre’s divisible pool of taxes – below the 42% recommended by the 14th Finance Commission –  Its recommendations, in any case, will impact the way budgeting is done.

Many states want a further extension of the 2022 deadline. Without a doubt, the Finance Commission must have a clear idea of the future roadmap on compensation to make credible projections on the likely revenues for states. There have been chop and changes in policy after GST rollout.