Kerala govt to protest against Centre at Jantar Mantar

What’s in today’s article?

• Why in news?
• Central Transfers to States
• News Summary: Kerala govt to protest against Centre at Jantar Mantar
• Allegations made by Kerala Govt

Why in news?

• The Kerala government, led by CPI(M), will stage an agitation at Jantar Mantar in New Delhi on February 8.
• On February 7, the Karnataka government held a similar protest over the distribution of central funds.

Central Transfers to States

• About
  • The Finance Commissions recommend the States’ share in the net tax revenue of the Union government.
    • Under Article 280, the President is required to constitute a Finance Commission (FC) at an interval of five years or earlier.
    • Article 280(3)(a)says that the FC has the responsibility to make recommendations regarding the division of the net proceeds of taxes between the Union and the states.
  • The difference between the gross and the net tax revenue includes collection costs, tax revenue to be assigned to Union territories, and cess and surcharges.
• Composition of transfers
  • The central taxes devolved to states are untied funds, and states can spend them according to their discretion.
  • Over the years, tax devolved to states has constituted over 80% of the total central transfers to states.
  • The centre also provides grants to states and local bodies which must be used for specified purposes.
    • These grants have ranged between 12% to 19% of the total transfers.
• Tax devolution to states
  • The 14th FC considerably increased the devolution of taxes from the centre to states from 32% to 42%.
    • In the 15^th FC, share of states in the central taxes for the 2021-26 period is recommended to be 41%.
    • The adjustment of 1% is to provide for the newly formed union territories of J&K, and Ladakh from the resources of the centre.
  • The Commission had recommended that tax devolution should be the primary source of transfer of funds to states.
  • This would increase the flow of unconditional transfers and give states more flexibility in their spending.
• Formula used to distribute fund among states
  • Population/Demography - Population is an indicator of the expenditure needs of a state.
  • Demographic performance - Demographic performance criterion rewards states for their efforts to control population growth.
    • The commission considered indicators like fertility rate, infant mortality rate, and sex ratio to assess states' efforts.
  • Income distance– It is the difference between the per capita income of a state with the average per capita income of all states.
    • States with lower per capita income may be given a higher share to maintain equity among states.
  • Area is used as a criterion as a state with larger area has to incur additional administrative costs to deliver services.
  • Forest & Ecology - it indicates that states with large forest covers bear the cost of not having area available for other economic activities.
    • Therefore, the rationale is that these states may be given a higher share.
  • Tax and fiscal efforts
  • 
• Grant in aid
  • Besides the taxes devolved to states, another source of transfers from the centre to states is grants-in-aid.
  • As per the recommendations of the 15th Finance Commission, the following grants will be provided to states from the centre’s resource:
    • Revenue deficit grants
    • Sector-specific grants: Sector-specific grants is given to states for eight sectors: health; school education; higher education, etc.
      • A portion of these grants will be performance-linked.
    • State-specific grants: These will be given in the areas of: social needs; administrative governance and infrastructure; water and sanitation etc.
    • Grants to local bodies
    • Disaster risk management

News Summary: Kerala govt to protest against Centre at Jantar Mantar

Allegations made by Kerala Govt

• Due share in taxes denied
  • Kerala claims the Centre has made a curtailment of Rs 57,400 crore in the State Receipts in the current fiscal, and it is not getting its due share from the tax collected by the Centre.
  • It says that as per the statistics of 2021-23, on the national average, the Centre is to provide Rs 35 for every Rs 65 collected by the states.
  • But the Centre provides only Rs 21 against Kerala’s own tax collection of every Rs 79. Bihar gets Rs 70 out of Rs 100.
• Compensation for cessation of GST
  • Kerala says the state was deprived of a major source of revenue, Rs 12,000 crore this year, because of the cessation of GST compensation from June 2022.
    • After the GST was introduced in 2017, the Centre had said a compensation amount would be extended to states up to five years to make up for the shortfall in their revenue collection.
• Fall in allotment to Kerala from divisible pool of tax
  • In the divisible pool of tax collected by the Centre, 3.87% was Kerala’s share during the 10th Finance Commission period.
  • This has come down to 2.5% in the 14th Finance Commission and to 1.925% in the 15th Finance Commission.
    • The criteria for this devolution includes the state’s total area, population, forest cover and its efforts at population control.
    • But Kerala states that its effective birth control measures have actually contributed to the fall in the allocation of central tax.
    • The state wants the Centre to consider second generation development problems, lifestyle diseases, and the growing proportion of elderly in the population.
• Scheme for Special Assistance for Capital Expenditure
  • The Centre provides Special Capital Assistance to states in the form of a 50-year interest free loan.
  • However, Kerala feels that its guidelines are not practical.
  • Kerala had submitted proposals for financial assistance under the scheme, but it did not comply with some norms, particularly branding/naming of five central-sponsored projects in Kerala.
    • Kerala is against co-branding of these projects as the state is contributing 40 per cent of the share in majority of these schemes.
    • This results in the delayed transfer of both Capex and Central Share of Centrally Sponsored Schemes.
• Cut in state’s borrowing limit
  • The net borrowing ceiling of a state (the amount that it can borrow) for each financial year is determined by the Union Finance Ministry.
  • As per the Centre’s guidelines, Kerala’s eligible borrowing limit is Rs 39,626 crore.
  • The State Budget was prepared considering the same. But Kerala has been allowed to borrow only Rs 28,830 crore till now.
    • The borrowing limit was cut short mid-fiscal without any prior notice, based on improper calculation of public account balance.
• Inclusion of off-budget borrowings as state loan
  • Kerala has undertaken off-budget borrowings mainly for the Kerala Infrastructure Investment Fund Board (KIIFB) and Kerala Social Security Pension Limited (KSSPL).
  • In 2017, the Union Finance Ministry stipulated that all such borrowings of state government entities will also be taken into consideration while setting the state’s borrowing limits.
    • i.e., the Union considers the off-budget borrowings, mainly of KIIFB and KSSPL, as the borrowings made by the state government itself.

Q1) What is grant-in-aid?

A grant-in-aid is money given by a central or state government for a specific project. It is a payment in the form of assistance, donation, or contribution. Grants-in-aid are not loans, so no repayment is required. However, funds must be spent according to the federal government's guidelines for that particular grant.

Q2) What is GST?

GST, or Goods and Services Tax, is an indirect tax imposed on the supply of goods and services. It is a multi-stage, destination-oriented tax imposed on every value addition, replacing multiple indirect taxes, including VAT, excise duty, service taxes, etc.

Source: Kerala govt to protest against Centre at Jantar Mantar: its grievances over money allocation | PRS | The Hindu | PRS