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Revenue loss to states due to cut in excise duty and value-added taxes on fuel items by the Centre and states respectively will be more than offset by the gains from higher than budgeted tax devolution by the Centre to states.

. The FY22 revenue loss to the states due to indirect tax cut comes around Rs 440 billion whereas likely gains from the higher-than-budgeted tax devolution due to robust revenue receipts is around Rs 600 billion during the current fiscal.
. Following the rise in crude oil prices, the Centre reduced the road and infrastructure cess (RIC) component of the central excise duty levied on petrol and diesel.
. The cess is not shared with the states, hence causing no direct loss to them. However, since most states levy VAT on an ad valorem basis, the excise cut will lower their VAT inflows by around ?90 billion.
. Subsequently, varying VAT cuts on fuels have been announced so far by 25 states and Union Territories, and others may well follow.
. The revenue loss to all states and UTs from the VAT cuts on these fuels at Rs. 350 billion. Accordingly, their total revenue foregone is assessed at Rs. 440 billion for FY2022, in line with the expected revenue loss of the GoI.
. The central government slashed excise duty on petrol and diesel by ?5 per litre and ?10 per litre respectively, offering some relief to consumers on the eve of Diwali.
. The tax devolution to states is expected to exceed the Centre’s FY22 budget estimates (BE) by a substantial ?600 billion, and the FY21 by a healthy ?1.3 trillion.
. However, the tax devolution to the states was nearly unchanged at Rs. 2.6 trillion in first half (April-September) of both FY21 and FY22.
. Based on the expected upward revision in tax devolution to ?7.3 trillion in FY22 from the budgeted Rs. 6.7 trillion, the retention of the monthly amount of tax devolution at Rs. 475 billion in October-February FY22, will back-end the release of Rs. 2.3 trillion to March 2022, which will be inefficient from the cash-flow perspective for the states.
. Accordingly, there is a renewed case for the GoI to increase the monthly devolution to the states to avoid back-ended transfers.
. The revenue visibility will enhance confidence and allow them (states) to expedite expenditure, especially growth supportive capital spending.
(GS Paper- 2/ Polity/ Devolution of Funds/ Fiscal Federalism)

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