The Union cabinet recently approved the setting up of the 15th Finance Commission (FC) with N.K. Singh as its Chairman.
It has been asked to submit its report by 30 October 2019.
About the 15th FC
Commission is to finalise its tax-devolution formula after factoring in the impact on the Union’s fiscal situation, keeping in mind “the continuing imperative of the national development programme including New India – 2022” and government’s commitment to compensate states’ loss due to GST.
The commission has also been asked to propose measurable performance-based incentives in areas such as:
Efforts made by the states in expansion and deepening of the tax net under GST
Efforts and progress made in moving towards replacement rate of population growth, which refers to the total fertility rate that will result in a stable population without increasing or decreasing it.
Improvement in ease of doing business
Reign in populist measures
Implementation of flagship central schemes and disaster resilient infrastructure
Progress made in increasing tax/non-tax revenues
Promoting savings through adoption of direct benefit transfers
Promoting a digital economy; etc
About Finance Commission
Article 280 of the Constitution provides for a FC as a quasi-judicial body.
It is constituted by the President every 5th year or at such earlier time as he considers necessary.
The FC makes recommendations to the President on following matters:
The distribution of the net proceeds of taxes between the centre and the states, and the allocation between the states of the respective shares of such proceeds.
The principle that should govern the grants-in-aid to the states by the centre (out of the Consolidated Fund of India).
The measures to augment the Consolidated Fund of a state to supplement the resources of local governments on the basis of recommendations made by the state finance commission.
Any other matter referred to it by the President.
Recommendations made by the FC are only advisory in nature.
The Constitution empowers the FC to go beyond the core issues of how to divide taxes vertically between centre and the states on the one hand and horizontally between states on the other.
It also allows FC to make broader recommendations in the interests of sound finance.
Composition & Qualifications
It is composed of a Chairman and four other members to be appointed by the President.
The constitution authorizes the Parliament to determine the qualifications of the commission and the manner in which they should be selected.
Chairman should be an experienced person with experience in public affairs.
Four other members can be selected from amongst the following:
A judge of the High Court or one qualified to be one.
A person with special knowledge of finance and accounts of the government.
A person having wide experience in financial and administrative matters
A person who has special knowledge of economics.
FC & Federalism in India
The Constitution envisages the FC as the balancing wheel of the Fiscal federalism in India.
Every successive FC has to do a political balancing act by giving more resources to the states given the growing importance of sub-national governments in the Indian political economy.
It also needs to ensure that centre is not fiscally constrained given its role in key national public goods such as defence.
Successive finance commissions have increased the proportion of tax revenue that goes to the states—a necessary change given the growing importance of direct taxes as well as the need for higher spending by state governments in local public goods.
The First Finance Commission headed by K.C. Neogy had recommended that the states get a tenth of total taxes collected centrally. That share has steadily increased. The 14th Finance Commission headed by Y. V. Reddy recommended that the share of the states should be 42%.
Federalism can flourish only when it is accompanied by a strong central agency that credibly enforces the rules for a new political economy equilibrium.