Responding to a question in the Lok Sabha on 2 August, finance minister Nirmala Sitharaman said that the central government shared ₹5.95 trillion with the state governments from taxes earned during 2020-21.
The Centre earns money through several taxes, such as corporate tax, income tax, goods and services tax, Union excise duty and customs duty. A part of the taxes is shared with state governments.
As can be seen from the above chart, in 2020-21, the total amount shared by the central government with states was the lowest in five years. At the same time, the total amount that went to the Centre was the highest in five years at ₹14.24 trillion. This happened during a year when state governments were already stretched for funds because of the covid pandemic.
It is interesting to see that the state governments’ share amounted to ₹7.61 trillion in 2018-19 and has since fallen to ₹5.95 trillion. Meanwhile, the Centre’s share has risen from ₹13.17 trillion to ₹14.24 trillion during the same period.
These are absolute numbers that do not take the size of the Indian economy into account. The following chart does that by plotting the ratio of Centre’s share of taxes to the gross domestic product (GDP), along with the ratio of the states’ share of taxes to the GDP. The GDP is a measure of the size of an economy.
As shown in the following chart, the Centre’s share of taxes to the GDP ratio stood at 7.2% of the GDP in 2016-17. It was at 7.2% in 2020-21 as well. Meanwhile, the states’ share has fallen from 4% of the GDP to 3% during the period.
Over the years, the gross tax collection of the central government, which is split between the Centre and the states, has declined. But the charts show that the Centre hasn’t had to bear the cost of this slowdown; the states had to.
One reason for this lies in the fact that the central government has earned a lot of money over the last few years by raising the excise duty on petrol and diesel. But, at the same time, it has ensured that most of the excise duty earned is in the form of cess and surcharges, which it doesn’t need to share with the state governments. Currently, of the total excise duty of ₹32.90 per litre on petrol, the central government shares only 57 paise or 1.7% of the total amount with the state governments.
This has helped the central government remain unaffected even though the gross tax revenue has declined.
Vivek Kaul is the author of Bad Money.