How do states get revenue from the Centre? Center-State finance is a confusing topic unless you have come across the above figure.
Most of the states depend on the centre for the large chunk of their revenue.
The devolution process was based on many complex formulae before. However, now things have changed. In this post, we help you understand how states get revenue from the Center.
How do States get revenue from the Center (now)?
- Devolution (States’ share of taxes): As states share of taxes from the Gross Tax Revenue. (This is extra-budgetary)
- Scheme Related Transfer: As Centrally Sponsored Schemes from the Scheme Expenditure. (Based on Budget Allocations).
- Finance Commission Grants: As Transfer to States from the Transfers, Expenditure, and Other Expenses. (Based on Budget Allocations)
- Other Transfers: Other grants or loans. (Based on Budget Allocations).
Devolution (States’ share of taxes)
As per the 15th Finance Commission Recommendations, 41% of the divisible pool should be devolved to the States. (vertical devolution)
While distributing the 41 per cent among states, the formula recommended the Finance Commission should be used – which takes into weight different parameters like Income Distance, Population of 2011, Area, Forest & Ecology, Demographic Performance and Tax Effort.
Without including in Union Budget, Center transfers states’ share of taxes from the Gross Tax Revenue. This forms a significant part of the devolution.
Scheme Related Transfer
Another major transfer from the Center to states is in the form of Centrally Sponsored Schemes (CSS). This is part of the Union Budget.
Centrally Sponsored Schemes are divided into Core of the Core Schemes and Core Schemes.
Finance Commission Grants
Based on Finance Commission recommendations, the Center also gives states – (a) Revenue Deficit Grants (b) Sectoral Grants, and (c) Performance-based Incentives.
The Finance Commission Grants will be mentioned in the Union Budget.
Other transfers include grants and loans given to states – as mentioned in the Union Budget.
Understanding the Center-State Transfers: Budget Profile
The above figure is a sample Budget Profile of the Union.
The areas where you should look for Centre-State transfers are the blue circles.
As you can see the first big circle corresponds to states’ share of taxes which is extra-budgetary.
As part of the Budget, you can notice the Centrally Sponsored Schemes and Transfers to States (FC grants and other transfers)