The report of the 13th Finance Commission (TFC) tabled in Parliament alongside the Economic Survey has laid out important recommendations on sharing of financial resources between the Centre and states, path to fiscal consolidation at the Centre and in states and a road map for GST. But while the recommendations on the latter two aspects are likely to be well received, the new criteria for allocation of taxes among the states is likely to cause some heartburn.
The most outstanding recommendation is the revised road map for fiscal consolidation, which calls for a calibrated exit from the current expansionary fiscal stance and complete elimination of the central revenue deficit over the next five years. However, in the case of states, the targeted dates for achieving a revenue balance vary between 2011-12 and 2014-15 while the dates targeted for achieving a 3% fiscal deficit were spread between 2011-12 and 2013-14.
The TFC has also made recommendations to ensure quick implementation of targets. It has recommended release of state-specific grants only after the states amend their FRBM Acts to ensure compliance with the new targets. The broad aim is to reduce the consolidated debt-to-GDP ratio of the Centre and the states from the current level of 82% to 68% by 2014-15.
The TFC has also suggested incentives of Rs 50,000 crore over a five-year period to facilitate a grand bargain between the Centre and the states to ensure an early rollout of GST. The amount is to be used for compensating states for revenue losses, if any, and will sensibly be provided only if the states adopt the model GST proposed by the TFC.
This model envisages subsuming almost all state taxes, including stamp duties, entertainment tax and entry tax in the GST, uniform threshold and composition limits for both Centre and states, shifting responsibility of entire GST collection to the states, ending of area-based exemptions and targeting a revenue-neutral GST rate of 12% recommended by the task force report with 5% going to the Centre and 7% to the states. A single rate across all goods and services recommended by the TFC also eliminates most disputes and ensures that tax collections become more predictable.
In the case of tax sharing, the TFC has followed the general norm of a progressive increase in the states? share and recommended pushing up the states? share from 30.5% to 32% and justified it on the grounds of the higher buoyancy of central taxes. However, it refused the states? demand for inclusion of cesses and surcharges in the divisible pool in the belief that it would be subsumed in the central GST. The raising of the ceiling of the revenue account transfers to the states from 38% to 39.5% is also unlikely to affect the Centre as the current share is close to the new norms.
The real debate is likely to be on the horizontal distribution of the apportioned central taxes between the states. While the TFC has given population and area the same weights as in the 12th Finance Commission recommendations, which stood at 25% and 10%, respectively, it has increased the weightage for fiscal discipline from 7.5% to 17.5%. An important change has been the replacement of the income distance criteria and the tax effort criteria in the 12th Finance Commission recommendations to a single fiscal capacity distance criteria and the reduction of its weightage from 57.5% to 47.5%. The end result is that TFC has effectively provided greater emphasis on fiscal discipline.
The change in weightages has caused a substantial reallocation of the central tax apportioned among the states. While 18 of the 28 states have gained a larger tax share, the remaining 10 lost out. The highest gainers were Nagaland, Tripura, Manipur, J&K, Uttarakhand and Himachal. The increase in tax share of these six states ranged from 20% to 50%. Gains by another four states in the Northeast?Meghalaya, Assam, Mizoram and Arunachal?ranged between 10% and 15%. However, the gains were more marginal in the remaining eight states that included UP, Goa, West Bengal, Maharashtra, Rajasthan, Sikkim, MP and Punjab, where their respective shares went up by less than 10%.
But the more interesting group is the 10 losing states, which include poor states like Bihar and Orissa, medium-income states like Karnataka, Andhra Pradesh, Tamil Nadu and Kerala (all in the South), rich states like Haryana and Gujarat, and newly formed states like Chhattisgarh and Jharkhand.
While the decline in the tax shares of Bihar is a marginal 1%, that of Orissa is a more substantial 7%. Among southern states the smallest loser is Karnataka, where the losses are less than 3% and the largest loser is Kerala, whose share slipped by around 12%. The losses also varied sharply between the rich states. While it went down by a marginal 2% for Haryana, it is a high 15% in the case of Gujarat. Hence the likelihood of selective heartburn.
p.raghavan@expressindia.com