Finance commission is constituted under Article 280 of the Indian Constitution and is a quasi-judicial body. The President constitutes a finance commission every fifth year or at such earlier times as he considers necessary.
15th Finance Commission of India: Composition; Role; Recommendations
- The commission includes a chairman and four other members appointed by the President.
- The Chairman and members hold office for such period as specified by the President in his order.
- The Chairman and the members are eligible for reappointment.
- The Constitution of India authorizes the Parliament to determine the qualifications of the Chairman and members of the finance committee.
- The Chairman of the finance committee should be a person having experience in public affairs, and four other members should be elected from amongst the following:
- A judge of a high court or one qualified to be appointed as the judge of the high court.
- A person who has specialized knowledge of accounts and finance of the government
- A person who has experience in the administration and financial matters.
- A person who has specialized expertise in the field of economics.
Role of Finance Commission:
The Finance Commission is required to make recommendations to the President of India on the following matters:
- The distribution of the proceeds of taxes to be shared between the Centre and the states. The allocation of shares between the states of the respective shares of such proceeds.
- The principles govern the grants-in-aid to the states by the Centre.
- The measures required to increase the consolidated fund of a state to supplement the resources of the panchayats and the municipalities
- Any other important matter referred to it by the President in the interests of sound finance.
Such matters referred are:
- The Commission reviews the current status of the finance, deficit, debt level, cash balance, and fiscal discipline efforts of the states and the Centre and recommends a way for fiscal consolidation for the fiscal management.
- The Commission may propose measurable performance-based incentives for states, at the appropriate level of government
- The Commission shall use the population data from the census of 2011
- The Commission may review the Disaster Management Act, 2005
- The Commission covers five years commencing April 1, 2020
Points to note about 15th Finance Commission are:
- It is an advisory body.
- The Constitution of India envisages the Finance Commission as the balancing wheel of fiscal federalism in India.
- The 15th Finance Commission headed by N. K. Singh was required to submit two reports.
- The first report consists of recommendations for the financial year 2020-21. It was tabled in Parliament on February 1, 2020.
- The second report with recommendations for the year 2021-26 will be submitted by October 30, 2020
Important recommendations in the first report include
Devolution of taxes to states:
- The state share in the Centre's taxes is recommended to be decreased from 42% in the 2015-20 period to 41% for 2020-21.
- The 1% decrease will be provided to the newly formed union territories of Ladakh and Jammu and Kashmir from the resources of the central government
Criteria for devolution
- It is the distance of the state’s income from the state with the highest income.
- The income is calculated as average per capita GSDP during the three years between 2015-16 and 2017-18.
- It has been done to maintain equity among states.
- It is calculated by using the reciprocal of the total fertility ratio of each state, scaled by 1971 population data.
- States with a lower fertility ratio will score high.
- The total fertility in a particular year is defined as the total number of children that are born to each woman if she were to live to the end of the child-bearing years
Forest and ecology: It is calculated by the share of the dense forest of each state in the dense aggregate forest of all states
Tax Efforts: It is calculated as the ratio of the average per capita own tax revenue and the average per capita state GDP during the three-year term between 2014-15 and 2016-17.
Grants-in-aid for 2020-21,
Three types of grants will be provided to states:
- Revenue deficit grants,
- Disaster management grants and
- Grants to local bodies.
The Commission has also provided a framework for performance-based grants and sector-specific grants.
State-specific grants will be provided in the second report.
Revenue deficit grants:
- In 2020-21, about 14 states are estimated to have a total revenue deficit of Rs 74,340 crore post-devolution.
- The Commission suggested revenue deficit grants for these 14 states.
Special grants: In the case of three states (Karnataka, Mizoram, and Telangana), the sum of devolution and revenue deficit grants is estimated to reduce in 2020-21 in comparison with 2019-20. The Commission has suggested special grants to these three states aggregating to Rs 6,764 crore.
Sector-specific grants: The Commission has suggested a grant of Rs 7,375 crore for nutrition in 2020-21.
Sector-specific grants for these sectors will be provided in the second report:
- Pre-primary education
- Rural connectivity
- Police training, and
Performance-based grants: Guidelines for performance-based grants include:
- Implementation of agricultural reforms
- Development of aspirational districts and blocks
- Power sector reforms
- Enhancing trade including exports,
- Incentives for education
- Promotion of domestic as well as international tourism.
Grants to local bodies:
- The grants to local bodies for 2020-21 has been fixed at Rs 90,000 crore. For rural local bodies Rs 60,750 crore is recommended (67.5%) and for urban local bodies Rs 29,250 crore (32.5%).
- It is 4.31% of the divisible pool. It has been increased over the grants for local bodies in 2019-20, which is about 3.54% of the divisible pool.
- The grants will be shared between states based on population and area in the ratio of 90:10.
- The grants will be given to all three tiers of Panchayat, including village, block, and district.
Disaster risk management:
- The Commission suggested setting up National and State Disaster Management Funds (NDMF and SDMF)
- The objective of the funds is the promotion of local-level mitigation activities.
- The Commission has suggested the same cost-sharing patterns between the Centre and states to fund the State Disaster Management Fund (new) and the State Disaster Response Fund (existing).
- The cost-sharing between the Centre and states is
- 75:25 for all states, and
- 90:10 for north-eastern and Himalayan states.
Fiscal deficit and debt levels: The Commission recommends both central and state governments should focus on consolidation of its debt and follow the fiscal deficit and debt levels as per their respective Fiscal Responsibility and Budget Management (FRBM) Acts.
Off-budget borrowings: It recommended that both the central and state governments should do full disclosure of extrabudgetary borrowings. The outstanding extra-budgetary liabilities should be identified and eliminated in a time-bound manner
Tax capacity: In 2018-19, the total tax revenue of state governments and central government together stood at around 17.5% of GDP. India's tax capacity has broadly remained unchanged since the early 1990s.
The statutory framework for public financial management: The Commission suggested constituting an expert panel to draft legislation to provide for a statutory framework for the sound public financial management system.
However, tax revenue has been rising in other emerging markets. For this, the Commission recommended:
- streamlining tax rates,
- broadening the tax base,
- increasing capacity and expertise of tax administration in all tiers of the government
Good and Service Tax implementation: The Commission pointed out some challenges with the implementation of the Goods and Services Tax (GST).
- accumulation of large integrated GST credit,
- delay in refunds,
- the large shortfall in collections as compared to the original forecast,
- glitches in invoice and input tax matching, and
- high volatility in collections.
The Commission noted that there is continuous dependence of states on compensation from the central government for the shortfall in revenue is a matter of concern.
It advised that the structural implications of GST for low consumption states need to be considered.
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