States right in feeling that Cess collection is unacceptably high: NK Singh

In an exclusive interview with ETV Bharat's Deputy News Editor, Krishnanand Tripathi, Chairman of 15th Finance Commission, NK Singh said States are right when they perceive that the share of cess and surcharges have gone unacceptably high.

New Delhi:The share of Cess and surcharges in the total revenue collected by the Centre has gone up significantly in last ten years, from little over 10% to over 16%, and States are right when they perceive it to be unacceptably high, said NK Singh, Chairman of the 15th finance commission.

In an exclusive interaction with ETV Bharat, NK Singh, however, said the Commission could not do anything about it as deciding the composition of divisible pool was outside its mandate and only Parliament can decide the issue.

Finance Commission, a constitutional body, which is constituted every five years, decides the formula to divide the money from divisible pool between the Centre and States and among the States themselves. However, the States complain that the tendency of successive Union governments to impose Cess and surcharge in the budget rather than increasing the tax rate deprives them a fair share in the revenue collected by the Central government.

Edited Excerpts:

Q: How difficult it was for you decide the formula to divide the money between the Centre and States, and among States?

A: Since the first commission, all commissions had to deal with the challenging job of dividing the resources vertically from the divisible pool between the Centre and States and also horizontally, among the states themselves.

In addition, every commission has its own unique term of reference. This time defence was included in the ToR and we are also unique as we gave the recommendations for six years.

Q: The commission was constituted in November 2017 but Covid-19 pandemic struck before you could submit report. How did you factor in the change?

A: We are victim of this global pandemic, so it needed recalibration, likely revenue buoyancy for both the Centre and States. This time we gave revenue projections for each States, the desegregated path. The likely changes in the revenue numbers and change in revenue expenditure of each state based on these unique circumstances was one type of issue.

For the first time, we have devoted an entire chapter on health in the commission report and the need to recalibrate the expenditure on health, particularly for the third tier.

We had to go back to the drawing board to redraw the fiscal and debt road map for both the Centre and states.

Q: In your report, you have taken fiscal deficit to be 6.5% but in the budget it has gone up to 9.5%?

A: The fiscal deficit numbers for the Centre look to be misaligned from the numbers projected by us. I headed the FRBM committee of 2017, its report was accepted in 2018. One area of concern for the committee and also for the Commission was the need for transparency and credibility of fiscal data.

In past, through clever financial engineering, both the states and the Centre were doing off-budget borrowing which has been adversely commented upon by all investors, rating agencies and experts. The part of the reason for this huge pumped-up figure, the figure presented by the finance minister represents greater transparency and credibility in accounting process, reckoning the true number and as a consequence, the debt.

Currently, there are serious uncertainties about the recovery process. The pandemic has not run its course. There could be serious unanticipated fiscal pressures as we get out of the pandemic.

Q: States demand 50% share from the divisible pool, how did you address the issue?

A: All commissions receive the request to increase the share of states in the divisible pool, we also received that. The increase from 32% to 42% was significant. On the other hand, the Centre was reeling under the pressure of this increase. Prior to the 14th commission, there was only incremental increase, so the Centre was hoping for a downward revision.

We felt that revising it downward was appropriate looking at the fiscal pressures of states, and also raising it upward in times like these would also not be fair. So we preferred the path of stability and continuity.

The gross revenue receipts (GRR), our calculation for five year period is Rs 153.4 lakh crore. Exclude things that are not part of divisible pool, like dividends of the RBI, PSUs, interest realisation etc.

This gross tax revenue becomes Rs 135.4 lakh crore. Take out of this the Cess and surcharge and cost of collection, then the divisible pool comes to Rs 103 lakh crore. The 41%, which we have out of the divisible pool, comes to Rs 42 lakh crores.

We also recommended transfer of Rs 10.5 lakh crore by way of grants, Rs 4.22 lakh crore to the third tier, revenue deficit grant of Rs 2.95 lakh crore, Rs 1.22 lakh crore for disaster management. It is more or less even balancing, significantly more than 41%.

Q: States complain that in the last 10 years, the share of Cess and surcharges have gone up in the revenue collected by the Centre?

A: The share of Cess and surcharge as percentage of GTR in 2010-11 was 10.4% that in the BE of 20-21 has gone up to 19.9%, an increase of almost 90%.

The issue of Cess and surcharge is outside the ambit of the finance commission. After the 80th Constitutional amendment in 2000, the provisions of article 269 and 270 of the constitution specifically exclude inclusion of Cess and surcharge in the divisible pool. It is outside the mandate of any finance commission. It is for the parliament to amend this provision.

Please also look at the background, prior to 80th amendment, concept of divisible pool was different, in the early years, it was only income tax, excise duty was included later these were different variations of income tax and excise.

In 2000, the definition was changed to include all taxes, corporation tax was brought in fully, tariffs were included in the divisible pool. Definition was divisible pool got substantially enlarged in the year 2000.

The composition of divisible pool changed with the 80th amendment, it includes all taxes so the Cess and surcharges were specifically kept out of it.

However, we have taken note of it like previous commissions. We have recognised that currently, Cess and surcharge are close to 20% of the GTR, we have calibrated it downwards to 18.4%, which means, a signal for downward direction.

However, in this 20%, it includes the GST compensation Cess, which entirely goes to States. This compensation accounts for nearly 3.5%, it will come around to 16% or so.

But even an increase from 10.4% to 16%, which states also rightly perceive to be unacceptably high.