Finance Commission to study use of cess as a revenue raising tool

The study will likely be part of the initial groundwork by the Commission, which has a constitutional mandate to recommend the ratio in which the tax money collected by the Central government is to be divided among the states.

By: ENS Economic Bureau | New Delhi | Updated: March 1, 2018 1:50:17 am
Fifteenth Finance Commission, Finance Commission, N K Singh, Direct Benefit Transfer, indian express NK Singh, Chairman, 15th Finance Commission of India (Source: Twitter/@NKSingh_MP)

In the backdrop of the Centre increasing use of cess and surcharges as revenue-raising tools, the newly-constituted Fifteenth Finance Commission is expected to commission a study on the legality of the use of these levies, which essentially preclude the sharing of their proceeds with the states.

The study will likely be part of the initial groundwork by the Finance Commission, which has a constitutional mandate to recommend the ratio in which the tax money collected by the Central government is to be divided among the states. The panel, chaired by former Finance Secretary N K Singh, will submit its report by October 2019 and its recommendations will be in force for the five years starting April 1, 2020. The panel would use the population data of 2011 while making its recommendations.

Among the terms of reference (ToR) of the Commission, it has been tasked with proposing measurable performance-based incentives for States, including the “control or lack of it in incurring expenditure on populist measures” — a first in the nearly six decade old history of the constitutionally-mandated body. The panel also has the mandate to propose measurable performance-based incentives for states that have made efforts to expand and deepen the tax net, slowed population growth, promoted ease of doing business and saved money by adopting Direct Benefit Transfer where government subsidy is paid through bank accounts of users.

The previous Fourteenth Finance Commission had raised the share of states in centre’s tax revenue to a record 42 per cent for five year period starting 2015-16, up from 32 per cent earlier. The divisible pool consists of all tax revenue collected by the Centre, with the exception of surcharges and cess that are levied for specific purposes. The Finance Commission will also look at the impact on the fiscal situation of the Centre after the substantially enhanced tax devolution to states following recommendations of the Fourteenth Finance Commission, an official said.

Over the past few years, the Centre has increasingly used cess collections and surcharges as a means of shoring up its revenues, especially since the proceeds do not form part of the pool that has to be shared with states. In 2018-19, the Centre expects to collect Rs 3.02 lakh crore from cess and surcharges — nearly 9 per cent higher than the Rs 2.80 lakh crore it collected in 2017-18. Alongside the study on these levies, the Commission will also look into impact of the goods and services tax, including payment of compensation to states for possible loss of revenues for five years and take into account the responsibility of the central government and state governments to adhere to appropriate levels of general and consolidated government debt and deficit levels. It may also examine whether revenue deficit grants be provided at all, officials said.

“The Commission will review the current status of the finance, deficit, debt levels, cash balances and fiscal discipline efforts of the Union and the states, and recommend a fiscal consolidation roadmap for sound fiscal management,” an official said.

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