Finance Commission Terms of References: ‘Don’t reduce us (states) to being glorified municipalities’

By: | Published: May 18, 2018 4:46 AM

Kerala finance minister TM Thomas Isaac was speaking at Express Group’s Idea Exchange programme before joining a group of state finance ministers who later in the day petitioned President Ram Nath Kovind against the ToR.

GST, corporates, consumers, Thomas Issac, Kerala Finance Minister, PM Modi GST, Narendra Modi GSTIt’s crazy stuff. You are disturbing the architecture of GST… are making things complicated and discriminating between sectors. — Thomas Isaac Kerala FM, on GST sops for digital deals and sugar cess.

State governments have already suffered considerable erosion of their autonomous fiscal space and circumscription of revenue-raising ability (thanks partly to the goods and services tax), and they would virtually be reduced to “glorified municipalities” unless the 15th Finance Commission’s terms of references (ToR) change, Kerala finance minister TM Thomas Isaac said on Thursday. He was speaking at Express Group’s Idea Exchange programme before joining a group of state finance ministers who later in the day petitioned President Ram Nath Kovind against the ToR.

Isaac said though he was definitely not against “equity in distribution” and redistribution to address poverty and backwardness, the commission using the 2011 census data (instead of 1971) along with the weighty “income distance” yardstick would make redistribution almost the “only” criterion for horizontal distribution of Union resources among states. Such an approach could cost “progressive” states that have reached the replacement population level dear.

According to the Kerala finance minister, given the “badly drafted” ToR, his state’s tax-devolution share could potentially reduce to 1.7% or thereabouts from 2.5% during the 14th Finance Commission award period (2015-20). Kerala’s share was 3.06% in the 11th commission period and, according to Isaac, used to be even higher at around 3.5% earlier.

While the previous commissions relied on 1971 census, the YV Reddy-headed 14th commission ascribed 17.5% weight to 1971 and 10% to 2011 populations, while giving 50% weight to “income distance”.

Isaac said given the “perfect correlation” between population transition and economic stature — “though Gujarat where despite the economic advancement, the population rate hasn’t come down much is an exception” — the use of 2011 population would mean a “proxy” of backwardness criterion unfairly coexisted with the overt one of income distance (difference of a state’s per capita income from that of the state with the highest per capita income).

Isaac also expressed reservations about the ToR, saying, “The commission may also examine whether revenue deficit grants be provided at all,” and said this was one example of the “cavalier language” used in the ToR. Kerala is among the 11 states that receive post-devolution revenue deficit grants, which are pegged at a total of Rs 1.95 lakh crore during the 14th commission period. Such grants, Isaac noted, are a constitutional assurance.

According to him, the Finance Commission should be free to choose what kind of weights are to be given to the 1971 and 2011 population counts. “Why bind them (the commission)? Don’t try to micromanage through ToR,” he said.

As reported by FE, the NK Singh-led 15th commission has already sought to quell the controversy over the strong opposition from some states to its ToR by setting up a six-member council to “advise and assist” it on the ToR and “help in broadening the commission’s ambit and understanding”.

Isaac also denounced the idea of giving GST concessions to incentivise digital transactions and the proposed sugar cess. “It’s crazy stuff. You are disturbing the architecture of GST… are making things complicated and discriminating between sectors.” Any such promotion/grievance redressal could be done through the instrument of budget (outlay) rather than taxation, he opined.

Isaac said the reasons why GST revenues are below expectations is the tax’s “shabby implementation”. Kerala’s revenue, which at one point used to rise at a healthy 20%/per annum, is growing at less than 10% now (although it receives compensation that takes growth to 14%). “Now one year into the tax regime, we are debating about (a new) return form. We haven’t finalised the form yet. It going to take another six months and we are still collecting tax on the basis of self-declared forms. There is no scrutiny taking place, no mechanism in place to do that.”

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