India is the “union of the states”. Currently India has 29 states and 7 Union Territories. All these states and Union Territories get share in the taxes of central government at the interval of the 5 years on the basis of recommendations of the Finance Commission, set up by the President of India.
Apart from the recommendations of the Finance Commission, the central government is entitled to give more financial assistance to any state under the article 275 of the Indian constitution.
This article is explaining the criteria to give status of Special Category State to particular states and benefits received by these special states.
It is worthy to mention here that out of 29 Indian states, 11 states already have the status of Special Category States and 5 more states are demanding the same.
What is Special Category Status?
In the year 1969, the fifth Finance Commission (Chairman Mahavir Tyagi) had given status of Special Category States to three states (Jammu & Kashmir, Assam and Nagaland) on the basis of Gadgil Formula.The reason for giving special status to these three states was the social, economic and geographical backwardness.
Criteria to give status of Special Category States;
1. The state which is facing the problem of resources crunch
2. Low per capita income
3. Non-viable nature of state finances
4. Economic and infrastructural backwardness
5. Presence of sizeable tribal population
6. Hilly and difficult terrain
7. Strategic location along international borders
8. Low population density
Benefits for the Special Category States:
1. States with Special Category Status are exempted from excise duty, customs duty, corporate tax, income tax and other taxes to attract investment.
2. Centre bears 90% of the state expenditure (given as grant) on all centrally-sponsored schemes and external aid while rest 10% is given as loan to state at zero percent rate of interest. While general category states get 70% fund as loan and 30% in the form of grant.
Note: It is necessary to mention here that the amount, given by the central government in the form of grant to the states; is not required to be returned back to the central government.
3. A huge 30% amount of planned expenditure of the central budget goes to ‘Special Category’ States.
4. Special Category States can avail the benefit of debt swapping and debt relief schemes.
5. Special Category States get preferential treatment in getting central fund which attracts the development projects in the states.
6. Special Category States have the facility that if they have unspent money in a financial year; it does not lapse and gets carry forward for the next financial year.
Additional fund received from the central government encourages the state government to start more welfare oriented schemes for the holistic development of the state.