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BENGALURU : In a bid to push capital expenditure by states, the Centre has released two instalments of tax devolution to the state governments to the tune of 1.17 trillion in August as against a normal monthly devolution of 0.58 trillion. With this, the Centre is front loading tax devolution, which will allow states to go for infra spending during the year and support economic growth and employment. 

“This is in line with the commitment of the Government of India to strengthen the hands of States to accelerate their capital and developmental expenditure," the ministry of finance said in a press release on Wednesday.

The Centre's tax devolution to states is done in 14 instalments every year, generally one in each month up to February and three instalments in March. 

In the April-June period, 47,592 crore was transferred to states a month, data from the Controller General of Accounts showed. 

Centre has so far transferred 3.07 trillion from the Centre as tax devolution in the first five months of FY23, amounting to 38% of the full-year budget estimate of 8.17 trillion. 

Aditi Nayar, chief economist, ICRA Ltd said that the step up in central tax devolution amount to 1.17 trillion in August 2022 from 478 billion each in April, May and June would encourage states to step up their capital spending in the post-goods and services tax compensation months. The five year GST compensation period for states ended on June 30, 2022. 

 “We anticipate that the 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. The assessed amount released so far works out to 34% of government’s estimate for tax devolution for FY2023, and a sizeable growth of 49% over the corresponding period of FY2022," said Nayar. 

She said that central tax devolution will overshoot the FY2023 BE, warranting an early reassessment of the monthly amounts being shared with the states to enable them to boost their capital spending, given the lead time required to plan and execute capital projects. 

In FY2022, a large part of the upside in tax devolution was back-ended to Q4, which ended up reducing state government borrowings in that quarter but did not translate to higher spending. 

The Centre released 8.8 trillion to the states in 2021-22, up from 7.4 trillion in FY21 and more than 6.7 trillion budgeted for the year. Nearly half of the 8.8 trillion in FY22 was released in Q4. After releasing 2.4 trillion in February 2022, it released 95,100 crore in March-end. 

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