The government on Monday constituted the 15th Finance Commission under the chairmanship of former expenditure and revenue secretary NK Singh with a task to recommend principles of devolution of central tax revenues and grants-in-aid to states and local bodies.
The government on Monday constituted the 15th Finance Commission under the chairmanship of former expenditure and revenue secretary NK Singh with a task to recommend principles of devolution of central tax revenues and grants-in-aid to states and local bodies. The terms of reference of the commission include a fiscal consolidation roadmap by factoring in appropriate levels of general and consolidated government debt and deficit levels; whether revenue deficit grants to states needed; measurable performance-based incentives for states based on their effort in areas including expansion and deepening of tax net under goods and service tax (GST) and ease of doing business. While making recommendation, the Commission would have to factor in the impact on the fiscal situation of the Union government after substantially enhanced tax devolution to states following recommendations of the 14th Finance Commission and the impact of the GST, including payment of compensation to states for possible loss of revenues for 5 years, among others. It would submit its report latest by October 30, 2019.
The members of the panel include former economic affairs secretary Shaktikanta Das and Anoop Singh, adjunct professor, Georgetown University. Two part-time members are — former chief economic adviser Ashok Lahiri and Niti Aayog member Ramesh Chand. The recommendations of the committee will cover a five-year period starting April 1, 2020. The recommendations of the 14th Finance Commission headed by former Reserve Bank of India governor YV Reddy are valid till March 31, 2020. Reddy had recently said that states might have got less than what they should have as share of the GST revenue, besides having left with less residual tax powers than the Centre.
He said the 15th commission could address the issue. The 14th FC had suggested an unprecedented 10 percentage points rise in tax devolution to states to 42% of the divisible pool of the tax revenue between FY16 and FY20, compared with the previous five-year period. It was accepted by the Narendra Modi government as it vouched for cooperative federalism. Making a compelling case for cooperative federalism, the 14th FC had suggested necessary institutional changes to minimise discretion and improve the design of fiscal transfers from the Centre to states, which are usually outside the commission’s ambit.
With higher untied funds to the states as per the recommendations of the 14th FC, the entire fund allocation process has become non-discretionary. Its recommendations increased total untied transfers to states in the five years through FY20 to 47.7% of the divisible pool of Centre’s tax revenue, up from over 39% between FY11-FY15, giving a tremendous boost to states’ fiscal space and spending flexibility. Also, in the aftermath of the FFC, 66 centrally sponsored schemes (CSSs) have been trimmed broadly to 30, entailing a higher tab for states in some CSSs as they now have more discretionary funds.