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17 TAXATION → FINANCE COMMISSION (वित्त आयोग)
Article 280: President of India forms a Finance Commission (a quasi judicial body) every 5th
Year or earlier, with 1 chairman and four members. Eligible for re-appointment.
Recommendations are not binding on the government but usually they are not rejected.
Further self-study@ M.Laxmikanth’s Indian Polity ch.45.
14th FC: YV Reddy Recommendation Period: 1st April, 2015 to 31st March, _ _ _ _
15th FC: NK Singh Recommendation Period: 1st April, 2020 to 31st March, _ _ _ _
17.1 VERTICAL TAX DEVOLUTION FROM UNION TO STATES
संघ से राज्यों तक कर का सीधा हसतांतरण
- Finance commission will recommend the vertical devolution from the ‘divisible pool’
of union taxes. (Here, CGST, Cess, Surcharge not counted.)
- 12th Rangarajan: 30.5%, 13th Vijay Kelkar: 32%, 14th Y.V. Reddy:_ _%, 15th NK
Singh: _ _ % (Homework update when report is released).
17.2 HORIZONTAL TAX DISTRIBUTION AMONG STATES
राज्यों के बीच समसतरीयकर वितरण
Finance Commission also gives formula for How to distribute that share horizontally with
individual States (Guj | Bihar | MH | TN...). 14th FC (YV Reddy)’s formula was…
14th FC horizontal distribution formula components Weight %
आबादी Population:as per Census 1971 17%
जनसाांख्ययकीय Demographic Change as per Census 2011 (To consider the 10%
migration angle.)
बदलाि
आय-दरू ी Income-Distance: _ _%
- Find the best State of India in per capita income (GSDP ÷ its
population).
- Compare your state’s per capita income with them.
Accordingly, poorer states get more weight
क्षेत्र Area: more area more weight 15%
िन-आिरण Forest-Cover: more forest cover more weight because of 8%
Opportunity cost (State can’t allow industries there, else it could
have obtained some taxes)
Based on above formula, Highest to Lowest: _ _ _ _ _ _ _ _ > Bihar > MP > WB > MH > Raj>
….. > Mizoram > Goa > Sikkim.
17.3 GRANTS FROM UNION TO STATES सांघ से राज्यों को अनद
ु ान
Apart from the tax devolution and tax distribution, the finance commission would also
suggest Union to give grant to the states (grant: NOT loan, so need not return with interest).
14th FC suggested three types of grants→
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1. For All States: Grants for Panchayati Raj Institutions (PRI) and Urban Local Bodies
(ULB). These grants will be subdivided into two parts: basic grant and (10-20%)
performance based grants.
2. For All States: Disaster Management Grants.
3. For 11 (कांगाल) States: Post-Devolution Revenue Deficit Grants for ~11 States.
17.4 FIFTEENTH FC COMPOSITION (SETUP IN 2017-NOV)
Chairman _ _ _ _ _ _ _ _ _ _ _ _ (Retd. IAS, Ex-Member of Parliament)
Member1 _ _ _ _ _ _ _ _ _ _ _ _ (Retd. IAS, RBI Gov)
Member2 Dr. Anoop Singh, Professor
Member3 Dr. Ashok Lahiri, Bandhan Bank
(Part Time)
Member4 Prof. Ramesh Chand. He’s member of NITI Aayog & Agri Economist.
(Part Time)
Secretary Arvind Mehta (IAS)
Deadline? 15th FC has to give report by 30th October, 2019.
Validity? From 1st April, 2020 to 31st March 2025.
17.4.1 15th FC Terms of Reference (TOR: विचारार्थ विषय)?
President of India has ordered them to study and recommend following:
1. Union Taxes’ Vertical devolution to the states, and its horizontal distribution among
the states. (except cess, surcharge and CGST).
2. Union’s grant-in-aids to the states.
3. How to augment State Govts’ Consolidated funds to help their PRI/ULBs
4. Any other matters referred by the President of India such as:
✓ Use Census-2011 for your calculation.
✓ Keep in mind Union’s responsibilities for New India 2022 vision.
✓ Recommend measures for Fiscal discipline, Fiscal consolidation for the Union
and State governments. Whether union government should continue to
provide revenue deficit grants to States?
✓ How to finance the disaster management initiatives?
✓ Performance based incentives to the state governments?
17.5 15TH FC’S TOR: APPREHENSION OF THE STATES (राज्य आशांकािान क्यों है )
17.5.1 States Fear#1: New India 2022
- 15th FC is required to keep New India 2022 vision in mind (wherein Modi government
aims to double the farmers’ income, provide housing for all, achieve 175GW of
renewable energy etc.).
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- 15th FC also required to keep in mind Union’s additional burden regarding defence,
internal security, infrastructure, railways, climate change, commitments towards
administration of UTs without legislature etc.
- So, TOR indirectly implying that 15th FC should give less than 42% to state
governments because union government needs more ₹ for aforementioned
activities. So, Non-BJP states are angry- “Tax evolution is our constitutional right”.
17.5.2 States fear#2: Performance based incentives (प्रदशथन आधाररत प्रोत्साहन)
15th FC will recommend performance-based incentives based on (list not exhaustive)
Performance
Why states apprehensive?
parameter
➢ Manipur can’t do as much as Maharashtra in deepening
the GST tax net, owning to the variety of economic,
geographic and political factors (frequent bandh and
State’s Efforts in expansion
blockades).
of GST tax-net
➢ Secondly, Constitution provides for a separate GST
council with representatives of state governments. FC
doesn’t have state representatives.
State’s Efforts in
achieving replacement Gangetic plain states’ total fertility rate higher, so they’re
level of population growth apprehensive that Kerala & other Southern States will get
i.e. Total Fertility Rate 2.1 more money.
or lower
State’s Efforts in Southern states have been running populist schemes for
controlling the free TV, Fridge, Mixer, farmers’ debt-waiver, Idli at ₹ 1 etc.
expenditure on populist Similarly Northern states run schemes for free bicycle,
measures (लोकलुभािन mobile & laptop schemes. They fear they’ll be reviewed
उपाय). negatively, and union will get to keep more money for itself.
Electricity theft is a rampant problem in certain Gangetic
State’s Efforts in
states but their ruling parties turn blind eye because of
controlling power sector
electoral populism. Now they are apprehensive of getting
losses
less money.
States resent that Modi’s Swatchh Bharat mission is
Behavioral changes to ‘imposed upon them’. FC devolution is their Constitutional
end open defecation. right, and not an alm (खेरात) tied to their implementation of
central schemes.
17.5.3 States fear#3: Census-2011 (जनगणना -2011)
- For horizontal distribution of taxes among states, 14th FC had used Census-1971
data. Census-1971 population was given 17% weight i.e. more populous state will get
mode funds.
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- 15th FC’s Terms of Reference (TOR) requires NK Singh to use ONLY Census-2011
data. But, Southern states have reduced their fertility rate between 1971 to 2011,
whereas Northern states could not- due to poverty, illiteracy and lack of healthcare
infrastructure. So, Southern states fear Northern states will get proportionately more
funds, if Census-2011 is used.
17.5.4 States fear#4: Debt and Grants (ऋण और अनद
ु ान)
- Article 293: States can’t borrow without consent of the Union. So, what additional
conditions should the Union impose on the states when they (states) borrow from
market / external sources? TOR even requires 15th FC to make recommendations in
this regard. States fear it’ll reduce their autonomy in raising loans from the market.
- 15th FC will also examine whether to abolish revenue deficit grants be given to the
States.
17.6 15TH FC: CONCLUSION ननष्कषथ
✓ SDG#10 reduce inequality within and among the countries. SDG#16 requires nations to
build effective, accountable and inclusive institutions at all levels. An equitable
distribution of revenue tied with performance incentives will help greatly in this regard.
Therefore, we should wait till 15th FC’s final report is released, before judging its adverse
impact on states. OR
✓ States have limited avenues for collecting direct and indirect taxes. Hence, they are more
dependent on the union devolution, and apprehensive of any reduction due to TOR.
Union finance minister and 15th FC Chairman have already tried to allay states’ fears
through letters and meetings. Picture will become clear when final report is submitted
latest by 30th October 2019. OR
✓ Economic Survey 2016-17 had observed ‘aid-curse’ in context of Redistributive
Resource transfer (RRT) i.e. over the years, Special Category States received large
amount of funds via Planning Commission and Finance Commissions yet couldn’t
perform well in poverty removal or economic growth due to lack of accountability and
poor governance. The 15th FC TOR aims to link the fund transfers with performance and
accountability parameters. While states are apprehensive, but such measures are the
bitter pills that we’ll have to swallow eventually to improve India’s human development
and economic growth.
Error in Answer Writing: Don’t digress to unsolicited suggestions & overthinking like
“Southern states should help Northern states in their family planning programs.”
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17.7 FC VS PC VS NITI: WHAT’S THE DIFFERENCE?
Finance Commission Planning Commission (PC) NITI Aayog
(FC) वित्त आयोग योजना आयोग ____ ____
____ ____
Constitutional body Created by executive resolution, so neither constitutional non
statutory. Both headed by _ _ _ _ _ _ _ _ as the chairman.
1951: 1st FC setup under - 1951: PC set up and over the - 2015: Formed.
KC Neogy years designed 12 Five Year - Three Year Action Agenda
plans (12th FYP: 2012-2017) (2017-20).
- 2014: Dissolved by Modi - Seven Year Strategy
Government. Document.
- Fifteen Year Vision
Document(2017-32).
- Taxes’ Vertical 1. How much money should It is not in its scope of work to
Devolution and union give to each state for decide how much money
horizontal distribution implementation of centrally should be given to each state.
among states. sponsored schemes (CSS)? That component is decided
- + any other matters 2. How much money should by the Finance Ministry.
referred by the union government give to - NITI’s primary objective is
President in TOR the five year plans of the to serve as the think tank
- Each finance state governments? of the Government of
commission arrived at To answer these Qs, PC would India,
its own methodology. use _ _ _ _ _ _ _ _ _ _ _ _ - Helps in policy design.
E.g. 14th FC: 42% formula (designed in 8TH FYP)- - Helps in monitoring
vertical, and 5 factor based on population, per capita schemes’ implementation
formula for horizontal income, special problems etc. of through its dashboard e.g.
distribution. a state. ‘School Education Quality
Index (SEQI)’, ‘SDG India
Index’ and the ‘Digital
Transformation Index’
(DTI).
We will see more about planning commission and Niti Aayog in Pillar 4
17.7.1 Special category states? विशेष श्रेणी के राज्य?
- 1952: The National Development Council was set up, consisting of PM, CMs and other
representatives to approve the five year plans prepared by the Planning Commission. But
became obscure with establishment of NITI Ayog.
- 1969: 5th Finance Commission recommended giving extra funds and tax-relief to certain
disadvantaged states. Over the years, NDC added more states into the Special Category
List based on (i) hilly and difficult terrain (ii) low population density and / or sizeable share
of tribal population (iii) strategic location along borders with neighbouring countries (iv)
economic and infrastructural backwardness and (v) non-viable nature of state finances.
- Examples: 8 North Eastern states and 3 Himalayan States (JK, Uttarakhand, HP).
- Benefits of Sp.Cat. States?
✓ If Industrialists set factories in these states, they’ll be given benefit in Union Taxes.
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✓ In Centrally Sponsored Schemes, Union will bear higher burden (90:10).
✓ FC & PC would assign more weightage in their formulas to give’em more funds.
- 14th FC: Previous Finance commissions would assign extra weightage & funds to
Sp.Cat states, but 14th FC stopped this practice. But, whenever elections are near,
W.Bengal, Bihar and Andhra CMs would demand Sp.Cat. status & blame Union for
‘injustice’.
- Economic survey 2016-17:आर्र्थक सिेक्षण Noted that Sp.Cat states have received lot of
funds & grant from previous FCs and PCs, and yet they have not made any tangible
progress in improving public administration or removing poverty (=” Aid Curse”: सहायता
का अभभशाप). Similar problem with States having abundant mineral resources (“Resource
Curse”: संसाधनो का अभभशाप).
- Economic Survey 2017-18: Noted that compared to Brazil, Germany and other
countries with federal polity, India’s state governments and local bodies are collecting
less amount of tax for two reasons
(1) constitution has not given them sufficient taxation powers
(2) even where constitution gave them powers like collection of Agricultural Income Tax,
Land Revenue, Property Tax- they are shy of collecting taxes for electoral politics. Hence
States/PRI/ULBs unable to deliver public services satisfactorily e.g. Public Schools, Public
Transport, Police, Drinking Water and Sanitation.
