Budget 2020-21: Analysts said the submission of the final report would be delayed because the government has sought to amend the terms of reference (TOR) of the FC earlier this year while extending its tenure by a month to November 30.
Union Budget 2020: In an unusual move, the 15th Finance Commission (FC) may submit an interim report of its recommendations soon for providing “necessary policy inputs or direction” to the government, as the Budget for 2020-21 is just less than three months away. The final report would be submitted only next year, a senior finance ministry official told FE.
The FC’s recommendations — which are supposed to be implemented from April 1, 2020, upon the government’s endorsement — are crucial to Budget-making, as the constitutional body suggests the devolution of taxes to states from the divisible pool. “The (central) government wants to know certain aspects of the recommendations so that it can prepare the Budget, keeping in mind the broad policy direction the FC is taking. A detailed report can come later,” said the official.
Current FC chairman NK Singh couldn’t immediately be reached for a comment. Analysts said the submission of the final report would be delayed because the government has sought to amend the terms of reference (TOR) of the FC earlier this year while extending its tenure by a month to November 30. The FC has been asked to examine whether “a separate mechanism for funding of defence and internal security ought to be set up and if so, how such a mechanism could be operationalised”. These were in addition to the directions in the original TOR.
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Also, the FC saw the departure of its then member Shaktikanta Das mid-way to head the Reserve Bank of India in December last year. Das was then replaced by former expenditure secretary Ajay Narayan Jha on the commission.
The TOR for the 15th FC stirred up many controversies, including the direction to use 2011 census for horizontal distribution of the resources among the states. The TOR also requires the commission to assess if the revenue deficit grants to some states required to be continued.
The FC’s recommendations are going to have important ramifications for the central government, facing as it is a severe crunch in tax revenue due to a sharp cut in the corporate tax rate recently (with potential gross tax revenue foregone of `1.45 lakh crore in FY20) and lower-than-expected GST collection. The Centre’s attempt to impress upon the FC to consider the feasibility of a separate mechanism for funding of defence and internal security from the divisible tax pool is seen by some analysts as an attempt to improve its own effective share in the resources. Already, states are unwilling to accede to an FC suggestion that the Centre compensating them for revenue loss to ensure they have a 14% annual increase in their GST revenue is not sustainable and hence the basis for compensation could be reviewed.
The current FC is also considering several key matters, such as incentivising states for uhshering in reforms like easing damaging rules and regulations in agriculture, or setting up rail connectivity to promote exports, according to its chairman Singh.
The 14th FC had suggested tax devolution to states at 42% of the divisible pool of the tax revenue between FY16 and FY20, compared with 32% in the previous five-year period. It was accepted by the Narendra Modi government as it vouched for cooperative federalism.
While some have pointed at the sharp 10 percentage point hike in states’ share in the divisible pool, M Govinda Rao, a member of the 14th FC, has argued that the effective hike is only three percentage points. This is because the 13th Finance Commission’s recommended devolution of 32% to states was only for non-plan requirements, while plan requirements of over 5.5% were given as a separate grant by the Planning Commission.
On top of this, the earlier FCs used to provide for separate grants for sectors like education, healthcare, environment, police and judiciary; these together made up for about 1.5-2% of the divisible pool. If all of these are taken together, the total transfers to states, excluding the central grants for state schemes was to the tune of 39% under the 13th FC, according to Rao.
The FC is formed every five years to recommend principles governing the allocation of tax revenue between the Centre, states and local bodies. The recommendations of the previous 14th FC, headed by former Reserve Bank of India governor YV Reddy, are currently valid for a period of five years through March 2020. The notification for setting up the 15th FC was issued in November 2017.