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Report of 15th Finance Commission

Report of 15th Finance Commission

  • The Commission was conducted by Mr. N.K. Singh and the report was titled ‘Finance Commission in COVID times.’
  • The Finance Commission is a Constitutionally mandated body that is at the centre of fiscal federalism.
  • The 15th Finance Commission is asked to submit two reports.  The first report consist of recommendations for the financial year 2020-21.
  •  The final report with recommendations for the 2021-26 period was tabled in Parliament on February 1, 2021.

Main Highlights in the report for 2021-26 :

  • The share of states in the central taxes for the 2021-26 period is recommended to be 41%, same as that for 2020-21.  The adjustment of 1% is to be provided for the new union territories of Jammu and Kashmir, and Ladakh from the resources of the centre.
  • Gross tax revenue for 5-year period is expected to be 135.2 lakh crore. Out of that, Divisiblepool (after deducting cesses and surcharges & cost of collection) is estimated to be 103 lakh crore.
  • The criteria for distribution of central taxes among states for 2021-26 period is same as that for 2020-21.  However, the reference period for computing income distance and tax efforts are different (2015-18 for 2020-21 and 2016-19 for 2021-26), hence, the individual share of states may still change.
  • The horizontal devolution is primarily based on three principles namely need of states, equity among states and performance of states.
  • To balance all three principles, six criteria are used to calculate tax distribution- Income Distance, Area, Population (2011), Demographic Performance, Forest and Ecology and Tax and Fiscal Transfers.
  • Income distance: Income of a state has been computed as average per capita GSDP during the three-year period between 2016-17 and 2018-19.  A state with lower per capita income will have a higher share to maintain equity among states.
  • Demographic performance:   The demographic performance criterion has been used to reward efforts made by states in controlling their population.  States with a lower fertility ratio will be scored higher on this criterion.
  • Forest and ecology: This criterion has been arrived at by calculating the share of the dense forest of each state in the total dense forest of all the states.                Report of 15th Finance Commission
  • Tax and fiscal efforts: It is measured as the ratio of the average per capita own tax revenue and the average per capita state GDP during the three years between 2016-17 and 2018-19.

Grants

  • The Terms of Reference of the Finance Commission require it to recommend grants-in-aid to the States.  These grants include: (i) revenue deficit grants, (ii) grants to local bodies, and (iii) disaster management grants.
  • The Commission has recommended a total of Rs 90,000 crore for grants to the local bodies in 2020-21.  This amounts to an increase over the Rs 87,352 crore allocated for 2019-20 for the same.
  •  The new allocation is 4.31% of the divisible pool.  Of this sum, Rs 60,750 crore has been recommended for rural local bodies, and Rs 29,250 crore for urban local bodies.  
  • These grants will be made available to all three tiers of Panchayat- village, block, and district.
  • Grants to local bodies (other than health grants) will be distributed among states based on population and area, with 90% and 10% weightage, respectively.
  • No grants will be released to local bodies of a state after March 2024 if the state does not constitute State Finance Commission and act upon its recommendations by then.
  • To promote local-level mitigation activities, the Commission has recommended the setting up of National and State Disaster Management Funds.

Fiscal roadmap

  • The Commission suggested that the centre bring down fiscal deficit to 4% of GDP by 2025-26. For states, it recommended the fiscal deficit limit (as % of GSDP) of: (i) 4% in 2021-22, (ii) 3.5% in 2022-23, and (iii) 3% during 2023-26.
    • Extra annual borrowing worth 0.5% of GSDP will be allowed to states during first four years (2021-25) upon undertaking power sector reforms including: (i) reduction in operational osses, (ii) reduction in revenue gap, (iii) reduction in payment of cash subsidy by adopting direct benefit transfer, and (iv) reduction in tariff subsidy as a percentage of revenue.
    • It recommended forming a high-powered inter-governmental group to: (i) review the Fiscal Responsibility and Budget Management Act (FRBM), (ii) recommend a new FRBM framework for centre as well as states and oversee its implementation.                    Report of 15th Finance Commission
  • The inverted duty structure between intermediate inputs and final outputs present in GST needs to be resolved. Revenue neutrality of GST rate should be restored which has been compromised by multiple rate structure and several downward adjustments.
    • A comprehensive framework for public financial management should be developed. An independent Fiscal Council should be established with powers to assess records from the Centre as well as states.

Other recommendations

  •  The Commission has recommended a grant of Rs 7,375 crore for nutrition in 2020-21.  Sectors for which sector-specific grants will be provided in the final report include: (i) nutrition, (ii) health, (iii) pre-primary education, (iv) judiciary, and (v) railways.  
  • Creation of a separate non-lapsable fund for modernization of defense and internal security. The objective is to bridge the gap between defense budget allocations and the projected budgetary requirements.

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