The Centre on Wednesday released an advance instalment in addition to the regular monthly instalment of tax devolution to states totalling Rs 1.16 lakh crore with an aim to increase capital and developmental expenditure.
“This is in line with the commitment of the government to strengthen the hands of states to accelerate their capital and developmental expenditure. The Union Government has released two instalments of tax devolution to state governments amounting to Rs 1,16,665.75 crore on 10th August, 2022, as against normal monthly devolution of Rs 58,332.86 crore,” a Finance Ministry statement said.
The Centre had, in January, released an advance instalment of tax devolution to state governments amounting to Rs 47,541 crore in addition to the regular devolution for the month, taking the total release amount to Rs 90,082 crore. It had advanced the payment of an instalment of tax devolution of Rs 47,541 crore in November 2021 also.
At present, 41 per cent of tax collected is devolved in 14 instalments during a financial year.
The advance release of the tax devolution amount to states is expected to ease fiscal pressure of states and incentivise them for extra spending, especially after the end of the compensation mechanism under the Goods and Services Tax (GST) regime, an official said. As per the GST (Compensation to States) Act, 2017, the states were guaranteed compensation at the compounded rate of 14 per cent from the base year 2015-16 for losses arising due to implementation of the taxation regime, for five years since its rollout. This came to an end on June 30.
Experts said that given the higher-than-anticipated non-excise tax revenues, tax devolution to states is expected to overshoot the budget estimates.
“Presuming that the amount devolved in July 2022 was half of the August 2022 figure, as the latter has been pegged as two monthly instalments, implies that a total of Rs. 3.18 trillion has been devolved in the first five months of FY2023, which is equivalent to 39% of the BE. We anticipate that central tax devolution will need to be as large as Rs. 9.3 trillion in FY2023, overshooting the FY2023 Budget Estimates, led by an expected upside in non-excise tax revenues,” Aditi Nayar, chief economist, ICRA said.
Given that capital spending and projects involve a considerable lead time, Nayar said, an early reassessment of the monthly amounts being shared with the states will help enable them to boost their capital spending. “In FY2022, a large part of the upside in tax devolution was backended to Q4, which ended up reducing state government borrowings in that quarter but did not translate to higher spending,” she said.