EXAMINING REVENUE DISTRIBUTION BETWEEN STATES AND THE UNION MAINLY DURING EMERGENCY AND PANDEMIC

There have been many discussions regarding whether India is a federal state or not. When we see the characteristics of the federal-state, then we find that one of the characteristics is the distribution of taxes. Hence, a federal-state always has a distribution of powers. Indian Constitution specifies the distribution of revenues where exclusive powers are given to the State, to collect taxes and exclusive powers rest with the Union in relation with taxes.

There are three lists, namely, central, State and concurrent lists, where the distribution of taxes is there in various entries. Hence, the distribution has been made appropriately.

The importance of such a distribution is very clear, as, with the distribution only, the Government will conclude as to how it has been distributed to each State and how much it should be kept in a consolidated fund of India to meet future needs. So, it's very important to see that equal distribution is made of revenues concerning their contribution.

Financial Relations between States and the Union

The centre-state financial relations are mentioned under Articles 268-293 of Part XII of the Constitution. Allocation of taxing powers- The Constitution has provided the union government and the state governments with the independent sources of revenue. Allocation of powers to Centre and the states is carried on in the following way:

(i) The parliament has exclusive power to levy taxes on the entries mentioned in the Union List.

(ii) The state legislatures have exclusive power to levy taxes on the subjects mentioned in the State List

(iii) Both the parliament and the state legislature are empowered to levy taxes on the subjects mentioned in the Concurrent List.

(iv) The parliament has exclusive power to levy taxes on the matters related to the residuary subjects.

Centre-State Relations during Emergency

According to Article 352, during the operation of a national emergency, the distribution of revenues between the Centre and the states can be altered by the President.

During the operation of financial emergency (Article 360), the Union may give directions to any State to observe such canons of financial propriety as may be specified in the directions, and to the giving of such other directions as the President may deem necessary and adequate for the purpose.

Distribution of Revenue and the Pandemic

After the nationwide lockdown due to the coronavirus pandemic, states were hit with an unprecedented revenue shock. Revenue inflows of Delhi, for instance, fell 92% in comparison to April 2019. Most states saw a similar outcome from the pandemic. Hence to tackle the impact on revenue a few states, namely; Andhra Pradesh, Odisha, Rajasthan, and Telangana deferred the payment of a portion of the salaries of ministers and government staff. Maharashtra and Kerala announced cuts lasting a few months. Karnataka is holding an emergency sale of corner plots in Bengaluru.

The World Bank estimated that India's gross domestic product (GDP) would contract by 3.2% in 2020-21, resulting in a significant reduction in revenues realized by both the Union and state governments. India's federal fiscal structure provides for a system of sharing of revenue and expenditure between states and the Union. The Finance Commission is an independent constitutional body, which determines the criteria for revenue sharing. According to budget estimates for 2019-20, 52.5% of the states' total revenue was to be generated on their own, while 47.5% came with the help of central transfers. About one-third of the tax component is sales tax and excise—basically, taxes on liquor and petrol, the two main levers states are pulling today. Several states, including Delhi and Maharashtra, have taken the Centre's lead and increased duty on fuel. They also hiked duties on liquor to capitalize on the pent-up demand. Delhi, for example, levied an additional duty of 70% as a "corona fee".

More self-reliant states are feeling an immediate impact of the lockdown, the loss of central revenues has also affected states dependent on grants. They are likely to receive significantly lower central revenues than what they budgeted for. Already, payments from the Centre to states are delayed. The Centre has assured states an annual 14% increase in GST revenues for five years. Compensation for December 2019 to February 2020 was released only on 4 June, starving states of scarce revenue during the lockdown months. It is understood that normal GST collections this year won't be enough to meet that 14% annual growth promised. Either the Centre or the GST Council will have to borrow to meet the shortfall to states.

Long-Term Sustainability

The pandemic has underscored the fiscal vulnerability of states, and consequently, raised questions about their longer-term financial sustainability. In the absence of broad-based tax handles the Centre, states are left with two options: borrow more or cut spending. Both have their ramifications.

Conclusion

Post-covid, several states pleaded to the Centre to increase their external borrowing limits. The Centre has allowed states to borrow an additional 2% of their GSDP from the open market, but according to the guidelines. The first 0.5% can be borrowed without any conditions; 1.5% which is left would require them to undertake reforms in various spheres, including the public distribution system of food grains, ease of doing business, the power sector, and urban local bodies. M. Govinda Rao, member of the 14th Finance Commission and former director of the National Institute of Public Finance and Policy, said states might not be able to fulfil all the stipulated reform conditions. This will discourage them from borrowing, and they will, in a result, be forced to cut expenditure. This is the first time the Centre has levied conditions on states for external borrowing.