On Friday, the Centre released a significant tax devolution of Rs 1.73 trillion to state governments, marking a notable increase from the Rs 89,086 crore devolved in December 2024. This move is part of the Centre’s efforts to support states in boosting capital spending and financing development and welfare-related expenditures.
The Finance Ministry said the higher devolution will help states boost capital spending and meet development needs. The ministry emphasized that this increased allocation would help support the states’ ongoing welfare and infrastructure projects.
Uttar Pradesh, Bihar, Madhya Pradesh, and West Bengal received the highest allocations from the devolution fund. The states are expected to use the funds to support their growing fiscal requirements.
The Budget Estimates for FY25 allocate Rs 12.2 trillion to states, a 10.4% increase from the Rs 11 trillion in FY24.
As per the established norms, the devolution of funds from the divisible tax pool occurs in 14 annual instalments, 11 in the first 11 months and three in March.
After Jammu and Kashmir’s bifurcation, the 15th Finance Commission recommended devolving 41% of central taxes to states. Previously, the 14th Finance Commission had suggested a 42 per cent share for states.
It is important to note, however, that the central government can, in fact, reduce the states’ share of tax devolution by imposing cess and surcharge. As a result, the central government does not share these additional levies with the states, ultimately lowering the total amount devolved.
Data from the Controller General of Accounts shows a positive trend in transfers to states, with an annual growth rate of 5 per cent recorded between April and November of FY25. This indicates a steady increase in the Centre’s support to state governments.
The Finance Ministry is expected to relax norms for interest-free loans to boost capital expenditure utilization. This move aims to boost the efficient utilization of funds in the current financial year (FY25).
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