Special Status For States Unviable; Centre Has Option To Release Financial Packages For Bihar, AP

With a coalition government at the Centre, the demand for special status by states like Bihar and Andhra Pradesh is again in focus. Modi 3.0 will be under pressure from their two important coalition partners JDU from Bihar and TDP from Andhra Pradesh to grant special status to their states.

However, under the current provisions, special status for states does not exist. With the dissolution of the 13th Planning Commission in August 2014, the 14th Finance Commission has not made any distinction between special and general category states.

The government accepted the recommendations of the 14th Finance Commission and from April 1, 2015, it hiked the tax devolution to states from Centre, to 42 per cent from 32 per cent earlier, and also added a new provision of revenue deficit grants to states facing any resource gap.

Under the new provision, the total devolution to states in 2015-16 was hiked to Rs 5.26 lakh crore as against Rs 3.48 lakh crore in 2014-15, an increase of Rs 1.78 lakh crore.

States share is decided by a formula meant to incentivize demographic performance and each state's effort to mobilise its own tax revenue. The formula also takes into account geographic area, forest cover and the state's per capita income.

The 15th Finance Commission, under the Chairmanship of N K Singh, has revised tax devolution and brought it down to 41 per cent from 42 per cent after Jammu & Kashmir was carved out as a Union territory in 2019. So the current tax devolution to states stands at 41 per cent till 2026.

Under special category status, which was applicable till March 2015, special category states were getting 90 per cent of the financial contribution from the Centre for all centrally sponsored schemes, states' contribution was limited to only 10 per cent.

States like Assam, Tripura, Arunachal Pradesh, Meghalaya, Manipur, Nagaland, Mizoram, Sikkim, Uttarakhand, Himachal Pradesh and J&K were granted special category state status before 2015.

The 90:10 rule is still applicable to the northeastern and hill states, although there is no special status category. All the other states receive Central funding in a 60:40 ratio, 60 per cent being the Central government's contribution and 40 per cent states.

If the coalition government under Modi 3.0 decides to revisit the status and meet the demands of Bihar and Andhra Pradesh for a special category status, the proposal has to be referred to the 16th Finance Commission under Arvind Panagariya or to the NITI Aayog for their clearance.

In addition to Bihar and Andhra Pradesh, Odisha, Chhattisgarh, and Rajasthan have also been demanding special category status.

This clarifies that under the current provisions, special category status for states does not exist. But, the central government has the option to grant additional financial aid packages to states having revenue deficits and facing resource gaps. Andhra Pradesh and Bihar may be granted additional funds under this scheme.

On Tuesday, 11 June, the Centre has allocated Rs 1.39 lakh crore as tax devolution to states for June. The finance ministry said that this release is apart from the regular release of the devolution amount for the month of June. It will enable states to accelerate development and capital spending, said the ministry.

The Interim Budget for 2024-25 had earmarked Rs 12.19 trillion towards the devolution of taxes to states. With this release, the total amount devolved for 2024-25 to states till June 10, stands at Rs 2.8 trillion.

The Sixteenth Finance Commission is currently working on evolving the framework for tax devolution for the period from FY27-31. The Commission will examine the development needs of states and trends of tax buoyancy and obligations of the Centre, while arriving at its recommendations.

The finance ministry stated that in the latest round of fund release, Uttar Pradesh received Rs 25,069.88 crore, Bihar received Rs 14,056.12 crore and West Bengal received Rs 10,513.46 crore. Rajasthan received Rs 8,421.38 crore, while Madhya Pradesh received Rs. 10,970.44 crore. (ANI)