The virtual monopoly of financial powers in the hands of the central government has led to the concentration of other powers in the central government

Last week, I wrote that “relationships between central states have never been so tense”. Over the past few days, there’s been another flashpoint: who’s doing the most to cut taxes?

On May 21, the Minister of Finance announced that the government had decided to reduce “excise duty” by Rs 8 per liter on petrol and Rs 6 per liter on diesel. The notification was apparently made available very late in the day. Every channel that day and every newspaper the next morning assumed – and reported – that cuts had been made in excise duties (which are shared with states). It was wrong; reductions had been made in additional excise duties (which are not shared with states).

On May 22, the Minister of Finance tried to shame the States: “I reduced the duties, now you reduce the VAT”. It was an attempt at one-upmanship. As the numbers plummeted, it became clear that the Center had no reason to ask states to reduce VAT on gasoline and diesel.

The numbers don’t lie

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Let us first analyze the “reduction”. The windfall for the Center comes from the Supplementary Excise Duty (also known as Road & Infrastructure Cess or RIC), Special Supplementary Excise Duty (SAED) and Agriculture and Infrastructure Development Tax. infrastructures (AIDC) that are not shared with the States. In May 2014, all excise duty was Rs 9.48 per liter of petrol and Rs 3.56 per liter of diesel. As of May 21, 2022, the Center had increased duty to Rs 27.90 per liter on petrol and Rs 21.80 per liter on diesel. This was equivalent to an increase of Rs 18+ per litre!

Next, let’s look at the basic shared excise duty and the non-shared RIC that has been reduced:

Of the shared tax revenue, the Center retains 59% and all states share the remaining 41% according to percentages determined by the Finance Committee. All the States put together receive a pittance from petroleum products: 57.4 paise per liter of gasoline and 73.8 per liter of diesel! There is no material gain or loss through the basic excise duty.

The real source of revenue is non-shared excise duties. After increasing it by Rs 18+ per liter of petrol and diesel, on May 21, 2022, the Minister of Finance reduced it by Rs 8 and Rs 6 per litre, respectively! That’s what I call Rob Peter More and Pay Peter Less!

VAT is the main revenue

It is evident that the States receive practically nothing from the income generated by the Center thanks to gasoline and diesel. Their main source of income is VAT on petrol and diesel (the other source being taxes on alcohol). It should be noted that the States’ own resources as a proportion of total revenue are decreasing. Urging states to reduce VAT on petrol and diesel is like asking states to beg themselves: they will go bankrupt and be forced to borrow more (with central government permission) or carry a bowl begging at the Center for more grants. -help. What little financial independence the states have will evaporate. However, four states have made cuts in VAT: Tamil Nadu, Kerala, Maharashtra and Rajasthan.

Need a total review

Neutral observers have argued that the full range of powers and fiscal relationships of the Core States needs to be thoroughly reviewed. In particular, the operation of articles 246A, 269A and 279A relating to the GST laws must be reviewed. States must have more financial powers to raise their own resources. It is a fact that under-resourced states do not delegate sufficient funds to local urban and rural bodies and the result is that the 73rd and 74th Amendments to the Constitution are frozen. Neither funds nor functions nor officials are made available to municipal and panchayat bodies.

The virtual monopoly of financial powers in the hands of the central government has led to the concentration of other powers within the central government. The Center encroached on the legislative domain of the states (eg agricultural laws). The Center overstepped its taxing powers (for example, the IGST on sea freight, as pointed out by the Supreme Court). The Center has often exercised its executive powers to override the executive powers of state governments (e.g. transferring and “assigning” the Chief Secretary of West Bengal on the day of his retirement in order to punish the officer concerned and intimidate the State). Center policies tend to enforce uniformity across the country (eg, NEET, NEP, CUET). There has been a serious erosion of federal principles. The danger is that, when the time comes, federalism will be scrapped and India will become a unitary state – a proposal that was unequivocally rejected by the Constituent Assembly.

You decide, what do you want? An India with dehumanizing unity and uniformity among subjugated states or a federal India enriched by dynamic, cooperating and competing states?

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