Finance Commission gives states a huge tax windfall

Pointing out that this is the largest ever change in percentage of devolution, finance minister Arun Jaitley said, “States must gradually become self-sufficient; entire system of discretionary payments must end.”

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In a letter to all chief ministers, the Prime Minister said the increase in resources given to states will give them the required freedom to tailor make development schemes to suit their needs.

The higher tax share to states would also have a significant impact on the Centre’s revenue and expenditure projections and the fiscal consolidation roadmap to be presented in the Union Budget 2015-16 on February 28.

The recommendations of the Commission headed by former RBI governor YV Reddy would be applicable for the five year period starting April 1.

“The higher tax devolution will allow states greater autonomy in financing and designing of schemes as per their needs and requirements,” the report said, adding that the Centre has scope to improve its tax revenues and increase productive expenditure by raising its tax to GDP ratio.

It also recommended Rs 2.87 lakh crore as grants to local bodies using criteria of population and land area that would be divided into a basic grant and a performance grant. While panchayats would be given Rs 2 lakh crore in grants, municipalities would receive Rs 87,143 crore.

Though it did not award any special dispensation to debt-ridden states, the commission has provided Rs 1.94 lakh crore as a post devolution revenue deficit grant. “This would wipe out the revenue deficit of these states including Kerala, West Bengal, Himachal Pradesh and Andhra Pradesh,” Jaitley said.

Abhijit Sen dissents on tax devolution plan, suggests 38% to states

NEW DELHI: Former Planning Commission member Abhijit Sen, who was a part-time member of the Fourteenth Finance Commission has submitted a dissent note on the recommendations, suggesting that the devolution to states should be kept at 38 per cent.

“I recommend that the share of tax devolution be set at 38 per cent of the divisible pool in the first year of the award period and maintained at that level unless there is agreement in the new institutional mechanism to revert to the 42 per cent share of tax devolution,” he said in the dissent note, citing reasons of fiscal consolidation and legal entitlements for the Right to Education and the MGNREGA.

He also raised concerns pointing out that the manner in which present Plan expenditures have been incorporated in the assessment could be rather confusing.

Further, some states, especially backward districts, could be hit if the Backward Region Grant Fund is wound up, he said, while objecting to the pruning of the Rashtriya Krishi Vikas Yojana.

He also called for retaining the normal Central Assistance, based on the Gadgil-Mukherjee formula until otherwise decided by the successor of the National Development Council. ENS

Panel for fund to pay states for GST losses

ENS Economic Bureau

New Delhi: The Fourteenth Finance Commission has suggested that the government should set up a GST compensation fund to pay states for revenue losses once the goods and services tax is implemented.

In its report tabled in the Lok Sabha on Tuesday, the Commission said that as the Centre is not in favour of including a provision for such a fund in the Constitution, the fund could be created “through legislative actions in a manner that it gives reasonable comfort to states, while limiting the period of operation appropriately”.

The compensation should be given to states for five years with 100 per cent compensation be paid in the first, second and third years, while 75 per cent and 50 per cent compensation in fourth and fifth year, the report suggested.

Further, making a case for universal application of GST, the Commission suggested that all goods and services should be brought under the ambit of GST as any exclusion could lead to leakages of revenues due to disruption of tax credit chain and audit trails.

“The origin-based distortionary CST presently levied on inter-state sales of goods would have to be dispensed with once universalisation is achieved,” the Commission said.

While expressing difficulty in arriving at compensation in absence of the structure of the GST, the report said that the volume of compensation would not impose an excessive burden on Union finances.