In what can be termed as a windfall for States, the 14th Finance Commission has suggested a stupendous 10 per cent increase in their share in the Union taxes, taking it to 42 per cent. The Centre on Tuesday accepted the recommendations of the commission and as a result of this the States will now get an additional Rs1.78 lakh crore in 2015-16.
Addressing a Press conference soon after the Government accepted the panel’s suggestions, Finance Minister Arun Jaitley said that this shows the NDA Government’s commitment to cooperative federalism.
The report of the commission, headed by former RBI Governor YV Reddy, also recommended grants-in-aid of Rs48,906 crore for 11 revenue-deficit States, including Andhra Pradesh post division, West Bengal and Jammu & Kashmir, for 2015-16. For the period up to 2020, it will be over Rs1.94 lakh crore.
The total devolution to the States in 2015-16 will be Rs5.26 lakh crore, as against Rs3.48 lakh crore in 2014-15, representing an increase of Rs1.78 lakh crore.
The total devolution to States during the five-year period up to 2019-20 will be Rs39.48 lakh crore.
In a letter to all Chief Ministers, Prime Minister Narendra Modi said that the increased money with States will give them the required freedom to tailor-make
development schemes to suit their needs.
Besides raising the share of States in the divisible pool of central taxes from 32 per cent previously to 42 per cent, the Finance Commission also provided Rs2.87 lakh crore for the five-year period for panchayats and municipalities.
“The higher tax devolution will allow States greater autonomy in financing and designing of schemes as per their needs and requirements,” the report said.
Jaitley said that the 10 per cent increase in the States’ share is “the largest-ever change in percentage of devolution. In the past, when Finance Commissions have recommended an increase, it has been in the range of 1-2 per cent”.
The commission suggested a fiscal deficit target of 3.6 per cent for 2015-16 and 3 per cent in subsequent years.
Abhijit Sen, one of the four members of the Finance Commission, has submitted a dissent note suggesting that devolution to the States should be pegged at 38 per cent in the first year and should be maintained at that level unless there is an agreement to deal with the fiscal problems.
With regards to Goods and Services Tax (GST), the report said: “We expect that the final GST design would have all the characteristics of a good tax system such as broad base, low rate, minimum rate differentiation, low compliance cost and reduced distortions to the economy”.
“We recommend the creation of an autonomous and independent GST Compensation Fund through legislative actions in a manner that it gives reasonable comfort to States, while limiting the period of operation appropriately,” it added.
It suggested that 100 per cent compensation be paid to the States in the first, second and third years, 75 per cent compensation in the fourth year and 50 per cent compensation in the fifth and final year after GST roll out.
On revenue expenditure, the commission estimates that between 2015-16 to 2019-20 it would decline from 10.8 per cent to 9.6 per cent of the GDP primarily due to the reduction in the subsidy expenditure from 1.70 per cent in 2015-16 to 1 per cent in 2019-20.
With regard to the Centrally Sponsored Schemes (CSS), the Finance Commission has identified 30 schemes for transfer to the States after taking into account higher devolution.
However, in view of the importance of the schemes and legal obligations, only eight CSS would be delinked from support from the Centre, Jaitley said.