Finance panel tenure extended; award period now till FY26

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Published: November 28, 2019 2:29:45 AM

“The term extension will enable the Commission to examine various comparable estimates for financial projections in view of reforms and the new realities to finalise its recommendations for 2020-2026,” the government said.

Finance panel, Finance panel tenure, 15th Finance Commission, GST collections, corporate tax rate, GST revenueThe final report (FY22-FY26) would be submitted by the commission by October 30 next year.

Citing the rather recent changes in the 15th Finance Commission’s terms of reference (ToR) and new ‘realities’, the Union Cabinet on Wednesday extended its tenure by 11 months and expanded its award coverage period by a year to six years, ending March 31, 2026.

The commission will submit an interim report soon, covering only the financial year 2020-21 so that the upcoming Union and States Budgets will have the relevant inputs. The additional mandate to explore a separate funding
mechanism for defence and internal security accorded to the panel in July and the erstwhile state of Jammu & Kashmir becoming two UTs — J&K and Ladakh — are the major reasons for the extensions.

“The term extension will enable the Commission to examine various comparable estimates for financial projections in view of reforms and the new realities to finalise its recommendations for 2020-2026,” the government said.

The final report (FY22-FY26) would be submitted by the commission by October 30 next year. “The terms of reference (ToR) for the commission are wide-ranging in nature. Comprehensively examining their implications and aligning them to the requirements of the states and the central government will require additional time,” the government said.

Though not common, such long extension of the tenure of finance commission and prolongation of the award period from the norm of five years have some precedents. The eighth FC, for example, was to submit its report by October 1983, but the term was later extended to February 1984. In cases of the 9th and 11th commissions, the not only terms, but the award periods were extended to six years.

The 15th FC was originally scheduled to submit its report for five years (FY21-FY25) by October 30, but its tenure was extended till November 30 after the Centre unexpectedly amended its ToR 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”.

The Centre’s move is seen by some states as an attempt to improve its own effective share in the resources and attracted criticism, for its perceived potential to reduce the states’ fiscal space and undermine cooperative federalism.

The FC’s recommendations are going to have important ramifications for the central government as well as state governments, which are facing facing severe crunch in tax revenue due to a sharp cut in the corporate tax rate recently (with potential gross tax revenue foregone of rSC 1.45 lakh crore in FY20), lower-than-expected GST collections and states’ own other tax receipts.

As FE reported recently, after two years of creditable fiscal consolidation, states’ borrowing are seen to surpass estimates this year. revenue growth of the 17 states reviewed by FE, including transfers from the Centre, was just 2.4% in H1FY20, compared with 13.8% in the year-ago period. As many as eight of these states including Uttar Pradesh, Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh and Telangana reported yea-on-year decline in their tax revenue growth in the first half.

Already, states are unwilling to accede to the FC’s suggestion that the Centre compensating them for revenue loss to ensure they have a 14% annual increase in their GST revenue might have to be reviewed post the five year period ending FY22, with a possible lower threshold for assured recenue growth.

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 is another matter that including grants and funds for centrally sponsored schemes, there wasn’t actually much change in the share of states of central resources.

States are also concerned over the ToR virtually asking for a discontinuation of the revenue deficit grants received by eleven states.“The proposed increase in coverage of the period for which the Commission’s recommendations are applicable, will help medium-term resource planning for the state governments and the Central government. Making a five-year coverage available for the Commission beyond April 1, 2021, will help both state and central governments design schemes with medium to long term financial perspective and provide adequate time for mid-course evaluation and correction. It is anticipated that the impact of the economic reforms initiated in the current FY would be manifested in the data by the end of the first quarter 2020-21,” the government said.

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