Finance Commission: De-link funds to states from schemes

The radical recommendations have not gone down well with the department of expenditure in the Fin Min.

The Fourteenth Finance Commission has asked for all non-tax fund transfers to state governments to be delinked from schemes.

The report of the Commission headed by former RBI Governor YV Reddy has been submitted to President Pranab Mukherjee on December 16. The Commission’s recommendations, however, have not gone down well with the department of expenditure in the finance ministry as it is even more radical than the current fund sharing formula.

In its award, the Commission has also asked for raising the share of the states in net proceeds of Central taxes to about 35 per cent in each fiscal year, from the current limit of 32 per cent. The Twelfth Finance Commission had set the current cap, which was left unchanged by the Thirteenth Finance Commission, despite plenty of lobbying by state governments. YV Reddy’s team has argued for simplifying finance transfers from the Centre to the states. It has argued that tied aid from the Centre reduces the efficacy of the funds given to the states. The argument is also in line with the government’s thinking on the topic. The Niti Aayog constituted by the Cabinet on Thursday has been kept out of the purview of allocation of money to state governments. Because of the sensitivity of the issues no officials involved in the deliberations were willing to be quoted for this story.

The Indian Constitution mandates setting up of a Finance Commission every five years to decide on the sharing of tax resources between the centre and the states.

Since non-tax resources like plan fund were till now being administered by the Planning Commission, the Finance Commission had kept itself out of its purview.

The award of the latter on sharing of tax pool is mandatory for the governments while it has a recommendatory role for sharing of other moneys.

If the Central government accepts these recommendations, it will essentially scrap the distinction between plan and non-plan funds in the transfer of funds to state governments. It will also mean a huge jump in the responsibilities of the panel.

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The cumulative result of its recommendations this time would be raising of the indicative ceiling on overall transfers to states on revenue account at 39.5 per cent of gross revenue receipts of the Centre.

The current panel’s mandate was to decide on the devolution of tax revenues for the period 2015-16 along with the impact of the goods and services tax , amongst other issues. The report is expected to be tabled in the Parliament in the Budget session.

MORE POWER TO STATES

The Finance Commission has asked for raising the share of states in net proceeds of Central taxes to around 35% each fiscal from the current 32%.

The YV Reddy-led Commission has argued for simplifying transfer of resources to states and said that tied aid from the Centre reduces the efficacy of the fund transfer.