States upset as Centre set to defer revenue payments from monthly to quarterly

india

Updated: Oct 14, 2017 23:26 IST

The central government will transfer states’ share of federal revenues only once every three months beginning next financial year, leaving most states worried over their already-stretched finances.

States now get 42% of central taxes on the first day of every month, much of which goes into paying salaries, pensions, wages, administrative costs and interest on loans.

On August 16, the central government wrote to states that their share from the federal pool of taxes will be sent on the fifteenth of every month till end-March. Thereafter, the money will be transferred once every quarter.

Finance ministry sources told Hindustan Times that the central government has often had to borrow money to meet its revenue transfer commitments because tax receipts are usually subdued during the first few months of a financial year.

A slight alternation in the payment schedule would give the Centre additional elbow room as well as a clearer line of sight on revenue collection under the new Goods and Services Tax (GST) regime.

“There are uncertainties about revenue collection and the quantum of tax credits under the new tax regime,” a senior ministry official said on the condition of anonymity because he is not authorised to speak to journalists.

“With a major shift such as the GST, this is natural in the first few months of its implementation. Given this situation, the tax devolution schedule has been slightly altered.”

But the plan has sent shock waves through states whose profligacy of the past few years is in sharp contrast to the central government’s fiscal prudence.

The Reserve Bank of India data showed the combined fiscal deficit of states has been rising sharply since 2015, mainly on account of the restructuring of debt of state power discoms.

Several states have called the deferred payment plan unfair, and at least two, West Bengal and Telangana, have written to the Centre in protest. West Bengal finance minister Amit Mitra cited several reasons why the central government should reconsider its decision.

“Financial pressure to the state exchequer becomes the maximum at the beginning of every month due to huge liabilities...,” Mitra wrote. He also said changing the tax devolution schedule would force states to borrow or seek overdrafts, hence increasing its interest burden.

Many experts agree with the states.

“A change in schedule will impact the cash-flow planning of states. This money is used for expenses that cannot be postponed such as salary, pension, interest on borrowings and contracts. This change would lead to overruns for states,” said economist Mohan Guruswamy.

State’s share in the central tax pool was increased from 32% to 42% in 2015 following the recommendations of the 14th Finance Commission.

The share is calculated on the basis of a formula that takes into account a state’s geographic mass, demographic change and income.