15th FINANCE COMMISSION
Context: The report of the Fifteenth FC, along with an Action Taken Report, was tabled in Parliament on1st February
KEY HIGHLIGHTS OF 15TH FINANCE COMMISSION
- The Commission has reduced the vertical devolution the share of tax revenues that the Centre shares with the states from 42% to 41%.
- The 1 per cent decrease in the vertical devolution is roughly equal to the share of the erstwhile state of Jammu and Kashmir, which would have been 0.85% as per the formula described by the Commission.
- The Commission has said that it intends to set up an expert group to initiate a non-lapsable fund for defence expenditure.
- The terms of reference of the Commission included considering the Centre’s demand for funds for defence and national security.
- It may do so by creating a separate fund from the gross tax revenue before computing the divisible pool which means that states would get a smaller share of the taxes.
- The Fifteenth Finance Commission (FC) has considered the 2011 population along with forest cover, tax effort, area of the state, and “demographic performance” to arrive at the states’ share in the divisible pool of taxes.
- Shares of the southern states, except Tamil Nadu, have fallen with Karnataka losing the most.
15TH FINANCE COMMISSION
- The Fifteenth Finance Commission was constituted on 27 November 2017 against the backdrop of the abolition of Planning Commission (as also of the distinction between Plan and non-Plan expenditure) and the introduction of the goods and services tax (GST), which has fundamentally redefined federal fiscal relations.
- Shri N.K. Singh was the Chairman of 15th Finance Commission of India
- The Terms of Reference of the current Commission have some distinctive features, including recommending monitorable performance criteria for important national flagship programmes and examining the possibility of setting up a permanent non lapsable funding for India’s defence needs.
- The reorganisation of the State of Jammu and Kashmir into two Union Territories – one of Jammu and Kashmir and one of Ladakh – presents a new dynamic.
- The Finance Commission is a constitutionally mandated bodythat decides, among other things, the sharing of taxes between the Centre and the states.
- Article 280 (1) requires the President to constitute, “within two years from the commencement of this Constitution and thereafter at the expiration of every fifth year or at such earlier time as the President considers necessary”, an FC “which shall consist of a Chairman and four other members”.
- Under Article 280(3)(a), the Commission must make recommendations to the President “as the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under this Chapter and the allocation between the States of the respective shares of such proceeds.
- Accordingly, the Commission determines a formula for tax-sharing between the states, which is a weighted sum of the states’ population, area, forest cover, tax capacity, tax effort and demographic performance, with the weights expressed in percentages.
- This crucial role of the Commission makes it instrumental in the implementation of fiscal federalism.
- The Finance Commission is a constitutionally mandated body that is at the centre of fiscal federalism.
- Set up under Article 280 of the Constitution, its core responsibility is to evaluate the state of finances of the Union and State Governments, recommend the sharing of taxes between them, lay down the principles determining the distribution of these taxes among States.
- Its working is characterized by extensive and intensive consultations with all levels of governments, thus strengthening the principle of cooperative federalism.
- Its recommendations are also geared towards improving the quality of public spending and promoting fiscal stability.
- The first Finance Commission was set up in 1951 and there have been fifteen so far.
What is a finance commission? What is its significance to the federal polity? (15 marks)
Bring out the key recommendations of the 15th finance commission? (10 marks)