Relevance:

GS 2 || Polity || Constitutional bodies || Finance Commission

Why in news?

The Finance Commission and its purpose Article 280 of the Constitution requires that a Finance Commission be constituted. To recommend the distribution of the net proceeds of taxes between the Centre and states, and among the states.

15th Finance commission:

The formula for sharing revenues is decided by the Finance Commission every five years.

This time, however, the 15th Finance Commission will decide the formula for six years .

will decide the formula for six years The 15th Finance Commission (Chair: Mr. N. K. Singh) was required to submit two reports.

The first report, consisting of recommendations for the financial year 2020-21 , was tabled in Parliament on February 1, 2020.

, was tabled in Parliament on February 1, 2020. The final report with recommendations for the 2021-26 periods will be submitted by October 30, 2020.

Aim of Finance commission:

The main tasks of the commission were to strengthen cooperative federalism , improve the quality of public spending and help protect fiscal stability

, improve the quality of public spending and help protect fiscal stability 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

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’s chairman, N. K. Singh, said that the commission would need to define populism, as, the commission’s terms of reference (ToR) had a provision for rewarding states which were successful in eliminating or reducing expenditure incurred on populist schemes

Key recommendations in the first report (2020-21 periods):

Devolution of taxes to states: The share of states in the center’s taxes is recommended to be decreased from 42% during the 2015-20 periods to 41% for 2020-21.

The share of states in the center’s taxes is recommended to be decreased from during the The 1% decrease is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the central government. The individual shares of states from the divisible pool of central taxes.

The criteria used by the Commission to determine each state’s share in central taxes, and the weight assigned to each criterion

Income distance: Distance of the state’s income from the state with the highest income. Demographic performance : States with a lower fertility ratio will be scored higher on this criterion. Forest and ecology : Share of dense forest of each state in the aggregate dense forest of all the states. Tax effort: Reward states with higher tax collection



Grants-in-aid:

In 2020-21, the following grants will be provided to states: Revenue deficit grants, Grants to local bodies, and Disaster management grants. The Commission has also proposed a framework for sector-specific and performance-based grants. State-specific grants will be provided in the final report.

Revenue deficit grants : In 2020-21, 14 states are estimated to have an aggregate revenue deficit of Rs 74,340 crore post-devolution. The Commission recommended revenue deficit grants for these states

: In 2020-21, 14 states are estimated to have an aggregate revenue deficit of Rs 74,340 crore post-devolution. The Commission recommended revenue deficit grants for these states Special grants : In case of three states, the sum of devolution and revenue deficit grants is estimated to decline in 2020-21 as compared to 2019-20. These states are Karnataka, Mizoram, and Telangana . The Commission has recommended special grants to these states aggregating to Rs 6,764 crore.

: In case of three states, the sum of devolution and revenue deficit grants is estimated to as compared to These states are . The Commission has recommended special grants to these states aggregating to Rs 6,764 crore. Grants to local bodies : The total grants to local bodies for 2020-21 has been fixed at Rs 90,000 crore, of which Rs 60,750 crore is recommended for rural local bodies (67.5%) and Rs 29,250 crore for urban local bodies (32.5%) . This allocation is 4.31% of the divisible pool. This is an increase over the grants for local bodies in 2019-20, which amounted to 3.54% of the divisible pool (Rs 87,352 crore). The grants will be divided between states based on population and area in the ratio 90:10. The grants will be made available to all three tiers of Panchayat- village, block, and district.

: The total grants to local bodies for has been fixed at crore, of which Rs crore is recommended for . This allocation is of the divisible pool. This is an increase over the grants for local bodies in 2019-20, which amounted to of the divisible pool (Rs 87,352 crore). The grants will be divided between states based on population and area in the ratio 90:10. The grants will be made available to all three tiers of Panchayat- village, block, and district. Disaster risk management: The Commission recommended setting up National and State Disaster Management Funds (NDMF and SDMF) for the promotion of local-level mitigation activities. The Commission has recommended retaining the existing cost-sharing patterns between the centre and states to fund the SDMF (new) and the SDRF (existing). The cost-sharing pattern between centre and states is (i) 75:25 for all states, and (ii) 90:10 for north-eastern and Himalayan states.

Recommendations on Fiscal Roadmap:

Fiscal deficit and debt levels: The Commission noted that recommending a credible fiscal and debt trajectory roadmap remains problematic due to uncertainty around the economy. Both central and state governments should focus on debt consolidation and comply with FRBM Acts.

Off-budget borrowings: The Commission observed that financing capital expenditure through off-budget borrowings detracts from compliance with the FRBM Act. Both the central and state governments should make full disclosure of extra-budgetary borrowings.



Mains oriented question:

How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss (250 words)