State-level rumbles in the Indian federation: Can the 16th FC help?

livemint.com:

₹9.5 trillion as their tax share, which was 31.1% of the reported gross tax revenue of the Centre, well below the adjusted target of 40.8 %. The reason for that shortfall is that Central cesses and surcharges (education, health, familiar to all taxpayers), superimposed on the basic tax structure are excluded from the shareable revenue base because they are supposedly temporary add-ons. States accuse the Centre of using them as a stratagem to reduce the statutory payment to states.

An important caveat post the Goods and Services Tax (GST) is that a GST cess is levied and collected by the Centre, but only to pay compensation to those states which failed to reach a required revenue level during the first five years, till end-June 2022. The GST cess continues to be levied to cover deficits on compensation due to those states (my column of 4 August 2023; tinyurl.com/2wsdpjvk). So some part of the ‘denied distance’ is on account of a cess fully paid out to (some) states.

If states’ share is re-computed as a percentage of gross tax revenue of the Centre minus the GST cess, it goes up to 32.5% in FY23, still 8.3% below the FC target of 40.8 %. In addition to the tax share (the dominant component), FCs also prescribe absolute statutory grants, unconnected to Central tax revenue. If we add grant payouts in FY23 to the tax share, states received a statutory flow at 38.4% of gross tax revenue (minus the GST cess).