Thirteenth Finance Commission Report

Thirteenth Finance Commission Report

FINANCE COMMISSION*

The States always look up for proper devolution of taxes and grants at the periodically established Finance Commission. This is so since the core tasks of the Commission pertains to the sharing of central taxes with the states and central grants to states. A five member expert team, headed by economist Dr.Vijay L Kelkar has submitted its report on the Thirteenth Finance Commission to the Government. Where it has zeroed on three key objectives of inclusive and ‘green’ growth, macro economic stability and fiscal consolidation for both the Centre and the States particularly in view of the last couple of years when the economy had to undertake fiscal expansion in response to the worst global recession and domestic economic slowdown.

On sharing of Union taxes, the core task of the Commission, it has recommended that for its award period spanning from April 1, 2010 till March 31, 2015, the share of States in the net proceeds of Union Taxes be fixed at 32 per cent, against the 12th FC prescribed transfer of 30.5 per cent, an increase of 1.5 per cent. When grants are added, then the total divisible pool of revenue comes to 39 per cent as against 37.6 per cent earlier, even as grants are this time a slightly lower share of the total transfer. It has also said that the total transfers to the States on the revenue account be subjected to an indicative ceiling of 39.5 per cent of the gross tax revenues of the Centre.

On non-plan revenue deficit grant, the Commission has assessed the revenues and expenditures of the States for 2010-15 and projected the deficit for each State after factoring in the amount of share in Central taxes for that State. The Commission has recommended a grant of Rs 51,800 crore to meet this deficit for eight States. Besides, it has also favoured a performance incentive grant of Rs 1500 crore for three special category States of Assam, Sikkim and Uttarakhand that have graduated out of non-plan revenue deficit. With elementary education at State level remaining a problem area, the Commission has accorded a grant, based on the Sarva Shiksha Abhiyan norms, of Rs 24,068 crore equivalent to 15 per cent of the assessed needs.

In a bid to de-carbonize development in line with growing interests in promoting green growth, the Commission has favoured a grant of Rs 15,000 crore, each Rs 5000 crore for forest grant, promotion of renewable energy and for water sector. As there remains a gap between outlay and outcome due to deficiency in delivery mechanism or designing of proper schemes to help the needy, the Commission has recommended six grants for improving outcomes, amounting to Rs 14,446 crore over the award period. An incentive grant for reduction in infant mortality of Rs 5000 crore is to be released to States starting 2012-13 depending on the reduction in infant mortality rate (IMR) achieved by the States with reference to the baseline level of 2009-10 figures. Grant of Rs 5000 crore for improved delivery of justice has been proposed for Lok Adalats and Legal Aid, Alternate Dispute Resolution Centre, Heritage Court Buildings, State Judicial Academy and training of judicial officers and public prosecutors. With legal cost becoming dearer and lakhs of poor people denied access to justice, this move would help address the aberrations and anomalies in the system. Other components under this include, Rs 2989.10 crore for the Unique Identification (UID) programme based on the number of people covered under the UDI database, two grants of Rs 616 crore each for District Innovation Funds and improving statistical systems at district and State levels and a grant of Rs 225 crore for setting up database of employees and pensioners. There are also grants for the requirement of roads in a State amounting to Rs 19930 crore for four years of the award period beginning 2011-12. Finally, under grants, the Commission has provided Rs 27,945 crore for various State-specific needs of the States.

On the Goods and Services Tax (GST), the Commission has put in place a model GST structure that includes features such as single rate of 12 per cent of goods and service tax, against the extant cascading level of over 20 per cent for the Centre and States combined, zero rating of exports, inclusion of various indirect taxes at the Central and State level in GST ambit, major rationalization of the exemption structure. It has recommended a grant of Rs 50,000 crore for implementation as per the recommended model. All other indirect taxes, including stamp duty would fall under GST, meaning that the realty sector would be integral to the new framework. This is designed to stamp out tax evasion in realty deals. But, States have made it clear that they opt for a combined rate of 15-16 per cent, a concessional rate for essential items and a fairly large exemption list. As the differences on these remain to be thrashed out, the Government has accepted the GST recommendations in principle, pending the outcome of ongoing discussions.

On fiscal consolidation, the Commission has drawn a roadmap for fiscal deficit reduction and spelt out a combined debt target of 68 per cent of GDP, against 75 per cent in 2009-10. It has stressed the need for achieving and maintaining revenue account in balance and containing the fiscal deficit to 3 per cent of Gross State Domestic Product (GSDP) for the respective States by 2014-15.

As the Commission has been tasked to bring off budget financing like oil and fertilizer bonds in the mainstream which would raise the Union’s expenditure and liabilities, the Commission felt that disinvestment proceeds of PSUs should be included in the budget as non-debt capital receipt. Its estimate on disinvestment proceeds is conservative at 0.5 per cent of the DP in 2010-11 to move up by 0.1 upto 1 per cent of the GDP in the final year.

An important recommendation that might satisfy the interests of States relates to its proposal allocating revenues arising from the ‘fiscal commons’ such as ‘profit petroleum, profit gas and revenue shares from spectrum’. Since these are national resources and must perforce be the collective disposal of the Central and all States, there is a case to view such non-tax revenues that were predominantly in the domain of the Centre “as being sharable between the Centre and the States collectively”. In order to execute this proposal it needs to be included as a part of the divisible pool which entails Constitutional amendment.

On the whole, the 13th Finance Commission appears to be anchored on pragmatism and in line with present realities facing the economy. At a time when coalition governance has become a rule rather than an exception in national politics, the whole recommendations of the13th Finance Commission, most of which have been accepted by the Government, would go a long way in pushing cooperative federalism to new heights, ensuring harmonious Centre-State fiscal relations.