15th Finance Commission

  • Category
    Polity & Governance
  • Published
    19th Sep, 2019

Issue

Context

The ongoing 15th Finance commission consultations with states.

  • Constituted in November 2017.
  • Composition: Nand Kishore Singh (Chairman), Ajay Narayan JhaAshok Lahiri, Anoop Singh and Ramesh Chand (part-time member)Shaktikanta Dasresigned as a member of the commission after appointed as RBI Governor.
  • After the passage of the Fiscal Responsibility and Budget Management Act, 2003, some states still incur revenue deficits, so, the commission would have to either recommend the disbandment of revenue deficit grants, or, would have to recommend ways for further fiscal consolidation
  • Commission’s job was made harder because of the roll-out of goods and service tax(GST) regime in India, as, it had taken certain powers concerning taxation away from the union and the states, and, had given them to the newly formed GST Council.
  • The commission was asked by some MPs to recommend a plan on compensating states which suffered revenue losses after the roll-out of GST. Some parliamentarians also asked the commission to reassess the criteria of classifying a state as 'backwards. Some MPS also want Commission to create a financial buffer against oil prices
  • Terms of Reference: To give recommendations
    • For devolution of taxes and other fiscal matters for five fiscal years, commencing 1 April 2020
    • On strengthen cooperative federalism, improve the quality of public spending and help protect fiscal stability.
    • To examine whether revenue deficit grants be provided at all
    • To consider the impact of fiscal situation of the Union government of substantially enhanced devolution by the 14th Finance Commission, coupled with continuing imperative of the national development programme including New India 2022.
    • The demand on the resources of the State Governments, particularly on account of financing socio-economic development and critical infrastructure, assets maintenance expenditure, balanced regional development and impact of the debt and liabilities of their public utilities;
    • The demand on the resources of the Central Government particularly on account of defence, internal security, infrastructure, railways, climate change, commitments towards administration of UTs without legislature, and other committed expenditure and liabilities;
    • The impact of the GST, including payment of compensation for possible loss of revenues for 5 years, and abolition of a number of cesses, earmarking thereof for compensation and other structural reforms programme, on the finances of Centre and States
    • To consider proposing measurable performance-based incentives for States, at the appropriate level of government, in following areas:
      • Efforts made by the States in expansion and deepening of tax net under GST;
      • Efforts and Progress made in moving towards replacement rate of population growth;
      • Achievements in implementation of flagship schemes of Government of India, disaster resilient infrastructure, sustainable development goals, and quality of expenditure;
      • Progress made in increasing capital expenditure, eliminating losses of power sector, and improving the quality of such expenditure in generating future income streams;
      • Progress made in increasing tax/non-tax revenues, promoting savings by adoption of Direct Benefit Transfers and Public Finance Management System, promoting digital economy and removing layers between the government and the beneficiaries;
      • Progress made in promoting ease of doing business by effecting related policy and regulatory changes and promoting labour intensive growth;
      • Provision of grants in aid to local bodies for basic services, including quality human resources, and implementation of performance grant system in improving delivery of services;
      • Control or lack of it in incurring expenditure on populist measures; and
      • Progress made in sanitation, solid waste management and bringing in behavioural change to end open defecation.
    • The Commission shall use the population data of 2011 while making its recommendations.
    • The Commission may review the present arrangements on financing Disaster Management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005 (53 of 2005), and make appropriate recommendations thereon.
    • The Commission shall indicate the basis on which it has arrived at its findings and make available the State wise estimates of receipts and expenditure.

Background

Article 280 provides for a Finance Commission as a quasi-judicial body. It is constituted by the President every fifth year or even earlier. It is required to make recommendations to the President on the following matters:

  • The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states, the respective shares of such proceeds. The principles which should govern the grants-in-aid to the states by the Centre (i.e., out of the Consolidated Fund of India).
  • The measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and the municipalities in the state on the basis of the recommendations made by the State Finance Commission.
  • Any other matter referred to it by the President in the interests of sound finance.
  • Till 1960, the Commission also suggested the amounts paid to the States of Assam, Bihar, Orissa and West Bengal in lieu of assignment of any share of the net proceeds in each year of export duty on jute and jute products.
  • The Constitution envisages the Finance Commission as the balancing wheel of fiscal federalism in India.
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