Centre releases additional tax devolution to states ahead of festive season

New Delhi: The central government on Wednesday released an additional tax devolution to states worth ₹1.01 trillion ahead of the festive season to finance their welfare and development expenditure.

This devolution will be in addition to the scheduled devolution on 10 October and will enable states to accelerate capital spending, the Union finance ministry said in a statement late on Wednesday.

Uttar Pradesh has received the largest share of ₹18,227 crore or nearly 18%, with Bihar getting the second-largest share of the pie at ₹10,219 crore, a little over 10%.

Tax devolution from the central government is used by states to finance their development and welfare initiatives. These funds are released periodically and can be increased to allow state governments to manage economic issues.

The tax devolution is based on the recommendation from the Finance Commission, a constitutional body formed every five years to give economic and financial recommendations on centre-state relations.

While the Centre's transfers to states can be limited to be used conditionally, periodic tax devolutions, which make up about 80% of the Centre's overall transfers to states, can be spent as per the discretion of state governments.

This additional devolution comes ahead of India's festive season–typically the October-December period–when the country sees a massive hike in consumption.

As per the formula for tax devolution to states set by the 15th Finance Commission, 41% of the central government's tax revenue, excluding surcharges, is given to states. The amount that each state receives is based on criteria such as population and economic backwardness, among others.

The Centre's decision to provide additional devolution to states follows a major overhaul of the country's indirect tax system aimed at boosting consumption. The goods and services tax (GST) reforms, which became effective from 22 September, have eliminated rate slabs of 12% and 28%, creating a two-slab system with products and services taxed at 5% and 18%. Some products are also charged a 40% levy under the system.

Broadly, these GST reforms are aimed at boosting India's consumption. Prime minister Narendra Modi in his Independence Day address, as well as subsequent radio addresses to the nation, has urged all Indians to consume 'Swadeshi'.

The 15th Finance Commission was tasked with reviewing the impact of GST on the economy, and recommending performance-based incentives for states based on efforts to control population, promote ease of doing business, and control expenditures on populist measures, according to a report by PRS India.

In the additional tax devolution announced on Wednesday, Maharashtra is set to receive ₹6,418 crore, Gujarat will get ₹3,534 crore, Andhra Pradesh ₹4,112 crore, Madhya Pradesh ₹7,976 crore, and West Bengal ₹7,644 crore.