14th Finance Commission

Government accepts recommendations

  • The government recently accepted the 14th Finance Commission’s recommendation to devolve an unprecedented 42% of the divisible tax pool to states during 20015-16 to 2019-20, against 32% suggested by the previous commission. Henceforth, States will get a much higher share of central taxes.

Recommendations of the 14th Finance Commission:

  • Y V Reddy    -headed 14th finance commission recommended tax devolution form a larger part of the transfers from the Union government than earlier. It had suggested the Centre devolve Rs 39.48 lakh crore of tax receipts during the five years starting next financial year.

Other important recommendations:

  • Set up an independent council to undertake assessment of fiscal policy implications of Budget proposals
  • Replace existing FRBM Act with a debt ceiling & fiscal responsibility law
  • Wind up National Investment Fund and maintain all disinvestment receipts in the consolidated fund
  • Amend electricity Act to provide for penalties for delay in payment of subsidies by state governments
  • Submission of states on minimum guaranteed devolution turned down
  • Steps for states to augment revenues, such as property tax reforms and issuance of municipal bonds suggested
  • Set up autonomous and independent GST compensation fund
  • The commission suggested performance-based grants to panchayats and local bodies. It was recommended the ratio of basic-to-performance grant be kept at 90:10 for panchayats and 80:20 for municipalities. The Commission had also asked to do away with a distinction between Plan and non-Plan expenditure.

Its implications:

  • This move implies that grants for centrally sponsored schemes will have to be curtailed.
  • The acceptance of the recommendations mark at least five major shifts from the past. They are:
    1. the sizeable increase in tax devolution.
    2. taking into account plan revenue expenditures while assessing revenue deficit grants.
    3. discontinuing the distinction between special category and other states.
    4. desisting from awarding sector/state specific grants or to subject grants to conditionality.
    5. to suggest institutional mechanisms for better monitoring of fiscal rules and to achieve ‘cooperative federalism’.
    6. This will be a huge help to states in forging their own autonomously generated development scheme and keeping their fiscal deficit in check in the years to come.
    7. The decision will enable the states to utilise the enhanced resources according to the felt needs of the residents of the state.
    8. By accepting the recommendations of the finance commission, the Centre also has implicitly endorsed the fiscal deficit target of 3.6% of GDP for FY16 and 3% thereafter.

Finance Commission:

  • It is a constitutional body constituted under article 280 of the Indian Constitution by the President of India after every five years.
  • It is a quasi-judicial body consisting of a Chairman and four members appointed by the President and hold office during his pleasure.
  • It was formed to define the financial relations between the Centre and states.
  • They submit their recommendations to the president which are advisory in nature.

Functions of the Finance Commission:

  • Distribution of net proceeds of taxes between Centre and the States, to be divided as per their respective contributions to the taxes.
  • Determine factors governing Grants-in Aid to the states and the magnitude of the same.
  • To make recommendations to president as to take the measures needed to augment the Consolidated
  • Fund of a State to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the Finance Commission of the state.

Sources: PIB, BS, ET, fincominida.nic.in.

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