14th Finance Commission (2015-20)

The 14th Finance Commission (FFC) was appointed under the Chairmanship of Dr. Y. V. Reddy.

Terms of References

• Principles which would govern the quantum and distribution of grants-in-aid (non-planned grants to states
• The measures to augment state government finances to supplement the finances of local government
• To review the state of finances, deficit and debt conditions at different levels of government

Major Recommendations of FFC

Sharing of Union Taxes

• Increasing the share of tax devolution to 42 per cent of the divisible pool would serve the twin objectives of increasing the unconditional transfers to the States and yet leave appropriate fiscal space for the Union to carry out specific purpose transfers to the States.
• No minim um guaranteed devolution to the States.
• As service tax is not levied in the State of Jammu & Kashmir, proceeds cannot be assigned to this State.

Local Governments

Local bodies should be required to spend the grants only on the basic services within the functions assigned to them under relevant legislations.

Distribution of grants to the States using 2011 population data with weight of 90 per cent and area with weight of 10 per cent. The grant to each state will be divided into two, a grant to duly constituted Gram panchayats and a grant to duly constituted Municipalities, on the basis of urban and rural population of that state using the data of census 2011.

The grants to be divided in two parts – a basic grant and a performance grant for duly constituted gram panchayats and municipalities. In the case of gram panchayats, 90 per cent of the grant will be the basic grant and 10 per cent will be the performance grant. In the case of municipalities, the division between basic and performance grant will be on an 80:20 basis.

The grants should go only to those gram panchayats, which are directly responsible for the delivery of basic services, without any share for other levels using the formula given by the recent SFC. Similarly, the basic grant for urban local bodies will be divided into tier-wise shares and distributed across each tier, namely the Municipal corporations, Municipalities (the tier II urban local bodies) and the Nagar panchayats (the tier III local bodies) using the formula given by the respective SFCs.

In case the SFC formula is not available, then the share of each gram panchayat as specified above should be distributed across the entities using 2011 population with a weight of 90 per cent and area with a weight of 10 percent. In the case of urban local bodies, the share of each of the three tiers will be determined on the basis of population of 2011 with a weight of 90 per cent and area with a weight of 10 per cent and then distributed among the entities in each tier in proportion to the population of 2011 and area in the ratio of 90:10.

Performance grants are being provided to address the following issues:

(i) making available reliable data on local bodies’ receipt and expenditure through audited accounts; and

(ii) improvement in own revenues.

Comparison with 13th Finance Commission

• Enhanced the share of the states in the central divisible pool from 32% (by 13th FC) to 42% which is the biggest ever increase in vertical tax devolution.
• It has not made any recommendation concerning sector-specific rants unlike the 13th FC.

Central Government Subsidies

Total Central Government subsidies, as a proportion of GDP, amounted to 4.25 per cent in 2002-03 and 4.18 per cent in 2003-04. Such subsidies, after declining from a peak of 4.92 per cent in 1992-93 to 3.49 per cent in 1996-97, increased in recent years because of three reasons. First, subsidies in the petroleum sector, which were of budget, have been explicitly incorporated in the Central Government’s budget from 2002-

Second, there has been an increase in the share of explicit subsidies. While input costs have gone up, recovery rates have not gone up commensurately.