History- Important places, persons in news, Legislative Council in States: Issues & Way Forward, Finance Commission – Issues related to devolution of resources. We write simple, easy to understand articles, but always ensure high standards of quality. From UPSC perspective, the following things are important: Mains level: Mandate of the finance commission, Mains Paper 2: Polity | Functions & responsibilities of the Union & the States, issues & challenges pertaining to the federal structure, Prelims level: State Finance Commission (SFC), Mains level: Role of finance commissions in fiscal federalism and changes proposed, The reason behind the existence of the present form of federalism, Determinations of Raising of Taxes by different units of government, Problems in assigning different taxing responsibilities to different levels of government, The provision in Indian Constitution regarding the division of taxes, Recent changes in the division of tax proceeds, Finance Commission of India: Powers, Functions and Responsibilities. 41% of the divisible pool to be devolved to the States in the year 2020-21. The aim of this law is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner and for maximization of value of assets of such persons and matters connected therewith or incidental thereto. The Commission has recommended Rs 8,000 crore as performance-based grants for, There is an urgent need for synergistically combined. Fiscally stressed states of Kerala, West Bengal and Punjab are regular recipients of these grants due to high debt legacy. This imbalance is that the central government enjoy some important and fast-growing tax revenues like corporate income tax and personal income tax. One reason for this has been the economic slowdown, and lower-than-expected GST collections. ... relating to vertical division of taxes… Centre government needs to be more considerate of the financial woes of the State and try to deliver on the recommendations of the 14th Finance Commission report. Mains level : Maintaining Fiscal Federalism. From UPSC perspective, the following things are important : Mains level : Paper 2- Conditional grants to incentivise the states for reforms. Finance Commission is a constitutional body, that determines the method and formula for distributing the tax proceeds between the Centre and states, and among the states. The report of the CAG of India in 2018 has highlighted various advances done to keep the liabilities hidden. The population parameter used by the Commission has been criticised by the governments of the southern states. The ensuing drop in grants, combined with the tapering of the front-loaded revenue deficit grants is likely to leave a big gap in some states’ revenues. Investing in human capital through interventions in nutrition, health, and education is critical for sustainable growth. It underpins supply-side economics, Reaganomics, and the Tea Party’s economic policies. It has also introduced a slew of legislation as money bills, in a bid to bypass the Rajya Sabha’s sanction, even though these laws, Similarly, the role of the Governors has been. As capital spending on defence continues to fall well short of what is required, it is difficult to contest the premise that it needs to be bolstered. escrowing such a large amount from its resources will constrain the GoI’s budgetary management. A “camel’s nose” is a metaphor to describe a situation where one permits a small entry to an outsider into one’s territory, only to be soon pushed out entirely. Planning Commission is no more. They have been under a severe balance sheet crisis even before the pandemic, and the crisis created by the pandemic, and the moratorium offered, will explode when the chickens come to roost. 41% of the divisible pool to be devolved to the States in the year 2020-21. The Commission has reduced the vertical devolution — the share of tax revenues that the Centre shares with the states — from 42% to 41%. To account for increasing urbanization the share of urban local bodies in Finance Commission grants to local bodies should be gradually increased to 40 per cent over the medium term. That means assigning weights to things like population, the fiscal distance between the top ranked states and the others, etc. The Commission’s report will be critical on two counts: Recently, the Centre eased the states’ budget constraint, But this extra borrowing was conditional upon states. It will lay out the opportunity, initiatives and investment required to meet the desired value chain export aspiration. The Commission used the per capita GSDP of Haryana as the reference for calculating the income distance, and gave it a weight of 45%, down from the 50% assigned by the 14th FC. Recalibration enables the Union to set aside resources for special funding on defence. Tax buoyancy is one of the key indicators to assess the efficiency of a government’s tax system. Solve Value Chain Clusters (VCC) holistically with a focus on value addition. The effect of the demographic effort in increasing states’ devolution is not clear. We often refer this as the vertical fiscal imbalances. He urged a review of both the Seventh Schedule and Article 282 of the Constitution so as to give more flexibility to States in implementing centrally sponsored schemes. The Financial Stability Report (FSR) released by RBI recently has once again underlined the vulnerability of the Indian public sector banks (PSBs). The President has appointed 14 more Commissions since then. It was mandated by the act that the following must be placed along with the Budget documents annually in the Parliament: Total outstanding liabilities as a percentage of GDP. The Finance Commission (Miscellaneous Provisions) Act, 1951 was passed to give a structured format to the finance commission and to bring it to par with world standards. That report of the XV FC had pared the States’ share of the divisible tax pool from 42%, as recommended by the Fourteenth Finance Commission, to 41%, citing the creation of the UT of Jammu and Kashmir and Ladakh. Despite protests, most states are likely to comply with the conditions, to varying degrees. It is for reducing the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back. The FFC has emphasised the need to focus on the. An elected government is typically granted the powers to be able to raise revenues through taxation of its citizens and incur appropriate expenditure for their benefit. Constitutional bodies such as the finance commission can, at best, prepare the ground and provide incentives and disincentives. ; Among major donations include ₹500 crore from employees of the Defence Ministry, Army, Navy, Air Force and defence public sector units, as well as ₹500 crore each from the Tata Group and Reliance Industries. It is for the first time that a Finance Commission has recommended, The focus of urban grants for million-plus cities is. The Commission had then said that some of the key recommendations it was required to make would feature in its final report, including the viability of creating a separate defence and national security fund. The Commission had submitted an interim report for 2020-21 in 2019. In case the plan is not implemented within 180 days from the end of the review period, banks have to make additional provision of 20% and another 15% if the plan is not implemented within 365 days from the start of the review period. The FRBM Review Committee too made a similar recommendation underlining the need for an independent review by the Finance Ministry appointing the Council. ClearIAS provides free IAS online coaching, guidance, strategies, books, online study-materials and mock tests with a vision that no candidate should be left out of UPSC exam competition due to in-accessibility of expensive IAS classroom coaching. This is the second new aspect of the FFC recommendations. The report starts with the famous quote of Mahatma Gandhi: “The future depends on what we do in the present”. The days of imperialistic London are over. The Commission shall review the current fiscal status of the Union and the States, and recommend a fiscal consolidation roadmap. Horizontal division of taxes among the states using 5 factor formula: census 1971, census 2011, income distance, area and forest cover. State finance commissions would need to emulate the XV FC and its predecessors, and emerge as credible institutions. – Such an arrangement already exists for a number of funds in the public account, like the National Disaster Relief Fund. Consider the question “Examine the innovative approach adopted by the Fifteenth Finance Commission for the devolution of funds to panchayats and municipal bodies.”. MGR and other Chief Ministers of Tamil Nadu did not have to rush to New Delhi to make the decision to implement a midday meal programme and impose additional sales taxes to fund it. Leaders like N T Rama Rao built their political careers on an “anti-Centre” platform. Successive finance commissions have made efforts to address the emerging issues and challenges, but in a democracy like India, the debate goes on. There was a clash of interests between the Centre and states, producer and consumer states, large and small states and coastal and inland states. The other four members are selected from people who: Are, or have been, or are qualified, as judges of a high court, Have knowledge of government finances or accounts, or, Have had experience in administration and financial expertise; or. Redirecting funds from the good projects to the bad ones. The Indradhanush framework for transforming the PSBs represents the most comprehensive reform effort undertaken since banking nationalization in the year 1970 to revamp the Public Sector Banks (PSBs) and improve their overall performance by ABCDEFG. Progress made in sanitation, solid waste management and bringing in a behavioural change to end open defecation. These two amendments unnecessarily raise more challenges for the FFC. Some significant changes made by XV-FC compared to previous Finance Commissions: Mains level : Recommendations of the Finance Commissions. The Fifteenth Finance Commission (FC) has considered the 2011 population along with forest cover, tax effort, area of the state, and “demographic performance” to arrive at the states’ share in the divisible pool of taxes. This amounts to 4.31% of the divisible pool. The Finance Commission (FC) is constituted by the President of India every fifth year under Article 280 of the Constitution. It is not that the best-performing state will be allocated the highest share — even if delivery execution and governance are better — rather, the effort will be to narrow the development gap between states. Efforts made in expansion and deepening of tax net under GST. Recommendations of Dr.Y.V.Reddy’s 14 th finance commission for vertical devolution of Taxes from union to states. This will likely further reduce the tax revenues distributed to States for their own expenditure. How these conditions could benefit the states?”. They also deal with the devolution of unplanned revenue resources. For ULBs other than the million-plus category, the total grants are Rs 82,859 crore. Allocations for NDRF / SDRF will be further sub-divided into, Recovery and Reconstruction – 30 per cent. The Union government’s revised estimates of tax collections (net of devolution to states) for 2019-’20 were about 8.8% lower than its 2019-’20 budget estimates. Promoting digital economy and removing layers between the government and the beneficiaries. For Example, Gyan Sangam, a conclave of PSBs and financial institutions. This has become even more critical in the post GST scenario. Though it could request for another year’s extension to present its full five-year report citing the prevailing uncertainty. will need special focus from the government to achieve the noble objectives set before the Finance Commission. The Commission, headed by N K Singh, had submitted its Report to the President in December 2019. The finance minister announced the acceptance of its recommendation of retaining. Several provisions to bridge the fiscal gap between the Centre and the States were already enshrined in the Constitution of India, including Article 268, which facilitates levy of duties by the Centre but equips the States to collect and retain the same. The Finance Commission has not even made any serious effort to review the existing scheme of transfers in. But perhaps most egregious among the moves made is the gutting of Article 370 and the division of Jammu and Kashmir into two Union Territories. Progressive states would lose heavily if the population-based on the 2011 census was considered for the devolution of central funds. Any other matter related to it by the president in the interest of sound finance. Through a notification issued on Feb 12, 2018 the RBI laid down a revised framework for the resolution of stressed assets, which replaced all its earlier instructions on the subject. Additionally, it has also introduced a new criterion –, Tax effort is measured by the ratio of the three-year average of, The net result of the change in criteria is that. – it violates the Government Accounting Rules 1990 (GAR), which allow for creating a fund in the public account only for the implementation of specified schemes of ministries and not for entire budgetary allocations of departments. These institutions assist in calibrating sustainable fiscal policy by making an objective and scientific analysis. The budget provision for 2019-20 for defence and the police grant of the home ministry is about Rs 5,30,000 crore. There is an attempt to palm off the Centre’s expenditure obligation to the States and there is talk of even limiting expenditure powers of the States. Three years after it was constituted, the Fifteenth Finance Commission has finalised its report for fund devolution from the Centre to States for the five years from 2021-22 to 2025-26. APEIROGON TECHNOLOGIES PVT. It is a terrible mistake to presume that all of India can be governed from Delhi. Another entry-level condition for availing grants by rural and urban local bodies pertains to the timely availability of their accounts online from 2021-22 onwards. However the State government is understandably concerned that the stringent borrowing cap under the fiscal responsibility laws should not constrain its borrowing and spending ability over the remaining 11 months. For the first time, a finance commission has carved out resources meant for. - Poonam Dalal, ClearIAS Online Student. This constitute vertical devolution and how these resources are to be share among the states constitute horizontal devolution. GST Council has no clue of what the Finance Commission is doing and Finance Commission has even lesser clue of what the GST Council is doing. For the current year, even without any additional fiscal stimulus, the deficit is estimated at about 7% of GDP as against 3.5% estimated in the Budget due to a sharp decline in revenues. Elected State governments and leaders cannot be made dummies without any fiscal powers for long. It is very clear that successful economic growth, successful good quality employment depends on agglomerations that work. The 15th Finance commission makes recommendations for the period of 2020-2025 (5 years). The additional borrowing space of 0.5 per cent of GSDP for states is, The states’ fiscal arithmetic will alter in 2022-23 with the. The Commission’s recommendation for setting up the state and national level, For the first time, the Finance Commission has introduced a 10-25 per cent. Over the years, monitoring compliance with fiscal rules and costing policies and programmes have become major tasks of these councils. The Commission has continued with the approach and methodology adopted by the previous Commissions for tax devolution and revenue-gap grants. This paper examines the key recommendations of the thfc having a bearing on these two aspects of transfers, placing them in a long-term perspec tive. It is essential that State Finance Commissions are constituted every five years as per the mandate in Article 243I of the Constitution and arrangements are made for their robust functioning. This happened despite the land being on the concurrent list in the Constitution. Much of the economic policy control stayed with the Centre. It was constituted against the backdrop of the abolition of the Planning Commission and the distinction between Plan and non-Plan expenditure, and introduction of the Goods and Services Tax (GST). Various cesses and surcharges are becoming disproportionate proportion of overall divisible revenue. State governments need to ensure that state finance commissions are constituted on time, resourced right, and their recommendations taken seriously. It will lead to higher farm productivity and farmer income. Read to know…. They aim to provide nonpartisan oversight of fiscal performance and/or advice and guidance — from either a positive or normative perspective — on key aspects of fiscal policy. Control or lack of it in incurring expenditure on populist measures. Fiscal federalism is the economic counterpart to political federalism. XV-FC is mandated to give recommendations regarding. The Commission has recommended revenue deficit grants worth Rs 74,341 crore to these 14 states. The Union government has accepted this recommendation in principle. Keywords: Tax Devolution, Grant Distribution, Horizontal and Vertical Imbalance JEL Classification: JE6. The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State based on the recommendations made by the Finance Commission of the State. The deal could not be finalised until the Centre guaranteed to fill the revenue gap of states according to an agreed formula. Horizontal devolution is done primarily to enable the States to provide basic public goods and services with equivalent tax effort. To recommend grants to all tiers of the Panchayati Raj to enable pooling of resources to create durable community assets and improve their functional viability. It is well known that the efficiency of a government depends on, among other factors, its structure. Furthermore, the three states of Karnataka, Mizoram, and Telangana received special grants to make up the shortfall between untied transfers received by these States in the form of tax devolution plus revenue deficit grant in 2020-21 vis-a-vis the corresponding amount in 2019-20.
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