Finance Commisson may get extension to work on tax share of UT of J&K

Section 83 of the Jammu and Kashmir Reorganisation Act, 2019, which came into effect when the state of Jammu and Kashmir bifurcated into union territories of Jammu & Kashmir and Ladakh on October 31, requires the President to “make a reference to the 15th Finance Commission to include the Union Territory of Jammu and Kashmir in its Terms of Reference and make award for the successor Union territory of Jammu and Kashmir.”

The Commission is supposed to submit its report by November 30, after being given a month’s extension earlier.
As per the Constitution, the Finance Commission is required to recommend the distribution of net proceed of taxes between the Union and states and no Finance Commission has ever made an award for any Union territory.

Any special dispensation for the Union Territory of Jammu & Kashmir will also have to be done keeping in view similar demands by two other union territories with a legislature, Delhi and Puducherry, to be a part of the divisible pool.

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With another extension, the Commission is then likely to submit an interim report. The Fourteenth Finance Commission had faced similar issues during the division of Andhra Pradesh and Telangana.

Singh, at an event organised by the TIOL, said the Commission is faced with the fact that the tax revenue buoyancy is very low along with a low tax-GDP ratio.

On the GST compensation, Singh said the central government has already committed a 14 per cent compound annual growth rate in compensation for the states’ revenue shortfall and would cover the first two years of the Commission’s award period. “We have factored this in the projections which we have made. The states have to improve their tax buoyancy for the balance three years not covered under the guaranteed 14 per cent rate,” Singh said.

Expressing concern over the low tax buoyancy, he said the Finance Ministry has announced major initiatives including changes in Goods and Services Tax (GST) and improving compliance which will have multiplier effect. “I do also believe that the medium-term impact of the fundamental change in rate of corporate taxes in the long run will make India an important and more competitive investment destination,” he said.

Singh also said that in some ways tax reforms are even more challenging today.

The GST and direct tax need to be simplified so that tax-to-gross domestic product (GDP) ratio improves, he added.