Finance Commission

The Constitution of India provides for, under Article 280, the establishment of a Finance Commission for purpose of allocation of certain resources of revenue between the Union and the State Government. Under Finance Commission (Miscellaneous Provisions) Act, 1951, the powers and functions of the Commission are usually regulated. The Finance Commission is appointed every fifth year. The President appoints the chairman of the Finance Commission and four other members whose qualifications are determined by the Parliament. The 14th Finance Commission has been set up under the former Reserve Bank of India Governor, Y.V. Reddy, for 2015 to 2020.

Under Article 280 of the Constitution, the Finance Commission is required to make recommendations to the President in respect of the following:

(a) the distribution of net proceeds of taxes to be shared between the Centre and the States, and the allocation between the States, the respective share of such proceeds.

(b) the principles which should govern the grants-in-aid by the Center to States out of the Consolidated Fund of India.

(c) the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and the Municipalities in the state on the basis of the recommendations made by the State Finance Commission.

(d) Any other matter referred to it by the President in the interests of sound finance. The government of India has accepted the recommendations of the 14th Finance Commission, some of the major recommendations are:

  • States share in the net proceeds of Union tax revenues increased to 42ft from 32ft earlier. This is the largest ever jump in percentage of devolution. In the past, changes have ranged between 1-2ft increase.
  • Eight Centrally Sponsored Schemes (CSS) delinked from support from the Centre. Finance Commission has identified over 30 CSS schemes to be delinked from Centre�s support but all have not yet been delinked considering the national priorities and legal obligations.
  • Sharing pattern under various CSS to undergo a change, with States sharing higher fiscal responsibility for scheme implementation.
  • Distribution of grants to States for local bodies based on 2011 population data (90ft weight) and area (10ft weight)
  • Revenue compensation to States under GST should be for five years; 100ft in first three years, 75ft in fourth year and 50ft in fifth year.
  • Create an autonomous and independent �GST Compensation Fund� through legislative actions to facilitate the compensation process.
  • Suggesting a fiscal consolidation roadmap, FFC puts a ceiling on fiscal deficit at 3ft of GDP from 2016-17 onwards.
  • Some flexible provisions for State�s borrowings over and above the annual limit of fiscal deficit at 3ft of GSDP.
  • Establish an independent Fiscal Council to undertake ex-ante assessment of fiscal policy implications of budget proposals and their consistency with fiscal policy and rules.
  • Suitably amend Electricity Act 2003 to facilitate levy of penalties for delays in payment of subsidies by the State Governments.
  • Have independent regulators for road sector for tariff setting, quality regulation, among other functions.
  • Several recommendations made for evaluating government�s ownership, disinvestment in Central Public Sector Enterprises.
  • In calculating grants to States, entire revenue expenditure taken into account without making distinction between �Plan� and �Non-Plan�
  • Calculations for distribution of divisible proceeds are based on the formula incorporating parameters of population (1971), changes in population since then, income distance, forest cover and area (refer Annexure for table)
  • Post devolution Revenue deficit grant to be given; 11 states identified (Refer annexure for table)
  • With greater fiscal space, states can meaningfully contribute to the overall growth and development in their regions, thereby adding to the aggregate growth of the nation
  • States will now have the flexibility to implement delinked CSS schemes as per local needs. Thisshould ideally ensure efficient utilization of government resources.

Written by princy

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