Dr Ashwani Mahajan
Generally recommendations of any Finance Commission become a subject matter of discussion; however 15th Finance Commission which has recently been constituted by the government is gathering heat even before it could start its work itself, because of its ‘Terms of Reference’. It is notable that N.K. Singh has been nominated as the Chairman of the 15th Finance Commission. As per the Constitution of India, a Finance Commission is constituted to recommend about the devolution of resources between the Union (Central) Government and State Governments, by way recommending sharing of union taxes; between the union and states and among states. Finance Commissions, prior to 9th Finance Commission, used to recommend devolution of only those taxes which were under the divisible pool under the constitution. However after 9th Finance Commission, now Finance Commission recommends devolution of all taxes, by way of recommending a percentage, which would go to states (and also the formula to divide the same among states). A major change occurred at the time of 14th Finance Commission, when it recommended to raise the share of states in union taxes suddenly from 32 percent to 42 percent, along with doing away with several Centrally Sponsored Schemes (CSS).
It is notable that in India we have a federal system of Governance, with three layers of government. Union Government at the central level, State Governments at state level and local bodies at local level. These entities raise revenue by way of taxes at their levels. At the same time they have non-tax sources of revenues too at their disposal. Constitution makers divided the taxation powers between union, states and local bodies on the basis of convenience of taxation and not on the basis of their respective requirement. Therefore, a provision of Finance Commission was made in the constitution, such that after every five years, Finance Commission would recommend about the devolution of resources between Union and States by way of division of central taxes and also grant in aid from union to states. The Finance Commission is constituted after every five years by the Government to make recommendations for next five years. 15th Finance Commission recommendation would be applicable from 2020 to 2025.
Controversies over Terms of Reference
Whenever a new Finance Commission is constituted, its terms of reference have always been a subject matter of debate. However, in case of 15th Finance Commission this debate has turned sour. Some terms of reference of 15th Finance Commission have particularly made some States Governments, especially non-BJP ruled states unhappy. Terms of reference state, “The commission may also examine whether revenue deficit grants be provided at all.” Fearing, probable financial loss, these states are seeking deletion of this stance. This fear is not unfounded, because with this the revenue deficit grant for states may end. The Finance Commission has also been asked to have regard to “The impact on the fiscal situation of the Union Government of substantially enhanced tax devolution to States following recommendation of the 14th Finance Commission, coupled with the continuing imperative of the national development programme including New India-2022”. The State Governments are fearing that due to this direction, Finance Commission may reduce the share of State Government in Central taxes. It is notable that due to the recommendation of 14th Finance Commission, raising states’ share to 42 percent, states have benefitted enormously. However, this has Geopardised the central budget.
It is notable that in its obsession to introduce goods and service tax (GST), the Central Government had promised the State Governments to not only compensate for any losses in their revenue, but also ensure 14 percent growth in the same. Due to this, Union Government is facing a huge problem in terms of revenue generation. In this regard Finance Commission has also been directed to take into consideration “The impact of the GST, including payment of compensation for possible loss of revenues for 5 years, and abolition of a number of casses, earmarking thereof for compensation and other structural reforms programme, on the finances of Centre and States.” For obvious reasons State Governments want to delete this sentence also from the terms of references.
In the last so many Finance Commissions, they were directed to make use of 1971 census for the purpose of distribution of resources amongst different states. Though it is always prudent to make use of latest census data for the purpose of rational distribution of resources amongst states, however, it was very surprising that the government had been insisting on the use of 1971 census for this purpose. 14th Finance Commission was allowed to use 2011 census data for a limited purpose. This time the President of India has put this condition of using 2011 census data for the purpose. Against this, several State Governments from southern states have complained that this would hurt their interests. It is notable that since 1971 southern states have been able to check population growth, whereas in most of the other states this has not been the case. Since southern states have non-BJP Governments, they feel that this condition has been imposed to benefit the northern states.
Whatever may be the said about the intention of the Union Government, we cannot question the legitimacy of using latest census data. One can easily understand that states with more population need more resources for provision of better facilities to take their people out of poverty. We should not forget that the per capita income of the states with more population is much less than the per capita income of the southern states. Although Finance Commission do consider the per capita income factor for the purpose of allocating resources, however, this gain gets washed away when older census data is used. This practice is also against the objective of regional equality. Though, opposition ruled states have been vehemently demanding tweaking of terms of reference of the Finance Commission, Union Government does not seem to be making a consideration for the same. We must understand that, Finance Commission is a constitutional body, it has always been above politics, recommendations of which are fully honoured by the Government, without questioning the implication of the same. Similarly, no cognizance is taken of the demand for change in the terms of reference.
It is believed that the financial relation between the union and the states is like a tug of war, where State Governments always try to get more resources in the form of share in taxes and also grants. However, on the other hand intention of the Union Government is always to give less to the states. This tug of war is not only between the union and the states, it’s also amongst different states, as every state wants that it gets bigger chunk of the share of the states. The Finance Commission is expected to use its prudence while making its recommendations within the limits of the terms of reference. Let’s wait and watch, how the Finance Commission under N.K. Singh balances this tug of war.
(The author is Associate Professor, PGDAV College, University of Delhi)
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