Findings:
- Over the past decade (FY16 to FY25), the share of Central transfers and grants in the revenue of Indian states has significantly increased, reaching 23-30% of their total revenue, up from 20-24% in the previous years.
- Meanwhile, own tax revenue and non-tax revenue have both seen a decline in states’ total revenue.
Relevance : GS 3(Economic Development) .
Decline in States’ Own Revenue:
- Own Tax Revenue: For over a decade, states’ own tax revenue as a share of total revenue has remained below 50%, which marks a stark contrast to the years prior to 2010 when it often exceeded 50%. Stamp duty, registration fees, motor vehicle tax, and SGST (State Goods and Services Tax) are primary components of own tax revenue.
- The share of SGST has grown significantly from 15% in FY18 to 22% of the total revenue, showing the increasing dependence on SGST to maintain tax revenue levels.
- However, without SGST, states’ tax revenue from other sources has declined from 34% to 28%.
- Non-Tax Revenue: The contribution of non-tax revenue to states’ total revenue is also on the decline and is expected to fall below 24% in FY25.
- The share of grants from the Centre constitutes 65-70% of non-tax revenue in the last decade, up from 55-65% earlier.
Dependency on Centre:
- States have been more reliant on the Centre for grants rather than increasing their own tax collection efficiency. The Centre’s share in non-tax revenue is particularly important for states’ fiscal balance.
- Interest receipts and dividends from public sector enterprises have remained minimal in the last decade, with interest receipts forming less than 5% of non-tax revenue and dividends/profits under 1%.
Inefficiency in Tax Collection:
- States have failed to improve the efficiency of tax collection, with stamp duty, registration fees, and motor vehicle taxes being identified as areas requiring better technical efficiency. Despite efforts to enhance collection from these sources, the impact has been sporadic and insufficient.
- Tax-to-GSDP ratio is declining in key states, with Tamil Nadu‘s ratio falling from 7.72% in FY13-15 to 6.17% in FY22-24, indicating a broader trend of weakening state-level tax collection.
Implications:
- Expenditure Pressures: While states face rising expenditure responsibilities, their inability to efficiently mobilize own revenue hampers their ability to adopt counter-cyclical fiscal measures, which could potentially boost aggregate demand and economic stability.
- Redistribution Impact: Falling own tax revenue collection limits the redistributive potential of state fiscal policies, making them more dependent on the Centre for maintaining fiscal balance.
Conclusion:
The increasing reliance on Central transfers and declining own revenue sources point to a structural issue in state finance management. States need to enhance their tax collection capabilities to reduce dependency on the Centre and improve fiscal autonomy. Effective tax reform, especially in property taxes, motor vehicle taxes, and stamp duties, could be a way forward to stabilize state revenue systems.
