15th Finance Commission Report

Context

The 15^th Finance Commission has submitted its report for 2021-22 to 2025-26 to the President.

Background

The 15^th Finance Commission is learnt to have recommended that states get 41% of central tax revenues, the same level that it proposed in its interim report for 2020-21 a year ago.

The report was titled ‘Finance Commission in Covid Times’, last year, the Commission had submitted its report containing recommendations for 2020-21 which was accepted by the Union Government and tabled in Parliament on January 30, 2020.

The Finance Commission

The Finance Commission is a Constitutional body formed by the President of India to give suggestions on centre-state financial relations. The 15th Finance Commission is required to submit two reports. The first report will consist of recommendations for the financial year 2020-21. The final report with recommendations for the 2021-26 period has been submitted now.

Significance of the Report

As per the terms of reference (ToR), the Commission was mandated to give its recommendations for five years from 2021-22 to 2025-26. The Commission was asked to give its recommendations on wide-ranging issues. Apart from the vertical and horizontal tax devolution, local government grants, disaster management grant, it was also asked to examine and recommend performance incentives for states in many areas like power sector, adoption of direct benefit transfer, solid waste management etc.

The Commission was also asked to examine whether a separate mechanism for funding of defence and internal security ought to be set up and if so how such a mechanism could be operationalised.

The Commission has sought to address all its ToRs in this report to the Union government. This report has been organised in four volumes. Volume I and II, as in the past, contain the main report and the accompanying annexes.

Volume III is devoted to the Union Government and examines key departments in greater depth, with the medium-term challenges and the road map ahead.

Volume IV is entirely devoted to states. The Commission has analysed the finances of each state in great depth and has come up with state-specific considerations to address the key challenges that individual states face. The report would be made public after it is tabled in Parliament by the government. The cover and title of the report are also unique and the use of scales on the cover indicates the balance between the states and the Union.

Point of Contention

When the Fourteenth Finance Commission recommended a sharp increase in their take-home cut from 32% to 42% of the divisible pool of revenues and the Centre accepted it, States had obvious cause to be upbeat and hence supportd.

Although, their actual shares of total taxes mopped up have turned out to be far lower as the Centre deployed more cesses and surcharges to garner additional revenues in recent years.

There are fresh reasons for the States to be anxious about the Commission’s revenue sharing recommendations, not in the least because of their recent stand-off with the Centre on the GST compensation dues this year. While 22 States have now come on board with a solution conjured up by the Centre, there are still loose ends as more dues pile up over the next two years.

Second, the Centre had tasked the Commission with assessing a few unusual ideas, including the creation of a non-lapsable fund for defence and security spending, and incentivising States for performance on reforms considered desirable by the Centre such as adoption of direct benefits transfer.

Southern States are worried that the use of 2011 population data, instead of 1971, will penalise them for managing population growth better. All these have the potential to impact States’ actual share.

Conclusion

Assessment made by the Reserve Bank of India, of State finances reveals they were already hurting from the slowing economy. The pandemic and the lockdowns have made things worse. Even last year, the commission had tabled an interim report for 2020-21 by saying a five-year forecast is tough when the economy is slowing down due to the effects of reforms like demonetisation and GST.

Its final report comes at an even more uncertain time, with the pandemic throwing the global economy is facing serious stress. The Centre should table the report in early to make possible of better financial planning by the states.

Connecting the Article

Question for Prelims: With reference to the Finance commission, consider the following statements:

1. It is a quasi judicial body.
2. It submits its report to the Parliament.
3. It is constituted in every three years.

Which of the statements given above is/ are correct ?

(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3

Question for Mains : Discuss the role of Finance Commission in sharing the divisible pool of tax revenues between the Centre and the States.