FOUTEENTH FINANCE COMMISSION
The Fourteenth Finance Commission (FFC) has recently
submitted its recommendations for devolution of taxes and other transfers from
the center to the states, and between the states, for the period 2015-16 to
2020-21. They are likely to have major implications for Center-State relations,
for budgeting by, and the fiscal situation of, the Center and the States. Some
of the recommendations are as follows. The FFC has radically enhanced the share
of the states in the central divisible pool of taxes from the current 32
percent to 42 per cent which is the biggest ever increase in vertical tax
devolution. The last two Finance Commissions viz. Twelfth (2005- 10) and
Thirteenth (2010-15) had recommended a state share of 30.5 per cent (increase
of 1 percent) and 32 per cent (increase of 1.5 percent), respectively in the
central divisible pool. The FFC has also proposed a new horizontal formula for
the distribution of the divisible pool among the States. There are changes both
in the variables included/excluded as well as the weights assigned to them.
Relative to the Thirteenth Finance
Commission, the FFC has incorporated two new variables:
2011 population and forest cover; and excluded the variable relating to fiscal
discipline (see Chapter 10 for greater details.) Implementing these
recommendations will move the country toward greater fiscal federalism,
conferring more fiscal autonomy on the States. For example, based on
assumptions about nominal GDP growth and tax buoyancy and the policy measures
that are contemplated for 2015-16, it is estimated that the additional revenue
for the states could be as much as ` 2 lakh crores relative to 2014-15. Of
this, a substantial portion represents the difference that is purely due to the
change in the States’ share in the divisible pool
Preliminary estimates shown in Table 1.4 suggest that all
States stand to gain from FFC transfers in absolute terms. However, to assess
the distributional effects, the increases should be scaled by population, Net
State Domestic Product (NSDP) at current market price, or by States’ own tax
revenue receipts. These are shown in columns 4-6 of Table 1.4. The biggest
gainers when scaled by any of these indicators tend to be the Special Category
States (SCS, mostly those in the NorthEast) and by orders of magnitude. The
major gainers in per capita terms turn out to be Arunachal Pradesh, Mizoram and
Sikkim for the SCS states and Kerala, Chhattisgarh and Madhya Pradesh for other
states (GCS or General Category States)
Clearly, this increase in taxes to the States is
sustainable for the center, only if there is a reduction in the central
(“Plan”) assistance to the states (CAS). In other words, States will now have
greater autonomy both on the revenue and expenditure fronts. It is also
possible to tentatively estimate what the FFC recommendations would do to net
spending capacity of the States, where net refers to the difference between the
extra FFC transfers and the reduced CAS that will be required by the FFC
recommendations.Broadly, the Special Category States will be the biggest
gainers. In addition, there are nine States among the GCS which are expected to
get more than 25 per cent of their own tax revenue (for details, see Chapter
10). A collateral benefit of moving from CAS to FFC transfers is that overall
progressivity will improve;
that is, on average, States with lower per capita NSDP
will receive more than those with a higher per capita NSDP. This results from
the fact that CAS transfers, which tended to be discretionary, were less
progressive than Finance Commission transfers. To be sure, there will be
transitional costs entailed by the reduction in CAS transfers. But the scope
for dislocation has been minimized because the extra FFC resources will flow
broadly to the states that have the largest CAS-financed schemes. In sum, the
far-reaching recommendations of the FFC, along with the creation of the NITI
Aayog, will further the government’s vision of cooperative and competitive
federalism. The necessary, indeed vital, encompassing of cities and other local
bodies within the embrace of cooperative and competitive federalism is the next
policy challenge
1)Which of
the following is NOT correct about
Finance Commission?
a)It is a
body set up under Article 280 of the Constitution.
b)Its
primary job is to recommend measures and methods on how revenues need to be
distributed between the Centre and states.
c) It
is appointed by President of India
d)It is
appointed for every 2 years
Ans : d
2)What is the
job of 14th Finance
Commission?
a) It
suggested the mechanism to share tax revenues,
b)the
Commission also lays down the principles for giving out grant-in-aid to states
and other local bodies.
c)In the
case of 14th Commission, these principles will apply for a five-year period
beginning April 1, 2015.
d) All the
above
Ans : d
.
3)Who is
the head of the latest i.e. 14th Finance Commission?
a)Former
Governor of the Reserve Bank of India, Mr. Y.V. Reddy, is the Chairman.
b)
C.Rangarajan
c) Vijay
Kelkar
d) None of
these
Ans : a
4)Who are
the other members in the 14th Finance Commission?
a)Abhijit
Sen, Member, Planning Commission;
b)Sushama
Nath, Former Union Finance Secretary;
c) M
Govinda Rao, former Director of National Institute of Public Finance and
Policy; Sudipto Mundle, former Acting Chairman, National Statistical
Commission; AN Jha, Secretary to the Commission.
d) All the
above
Ans : d
5)The
report is believed to contain a dissent note from whom ?
a)It
appears there is a dissent from Abhijit
Sen.
b)AN Jha
c)Sudpto
Mundie
d)None of
these
Ans : a
6)The key
recommendation of the 14th Finance Commission is that it has recommended an
increase in the share of states in the centre's tax revenue from the current 32
per cent to how much ?
a) 42 per
cent. This is indeed the single largest increase ever recommended by a Finance
Commission.
b) 35%
c) 40%
d) 60%
7) With
the increased share of states in the
centre’s tax revenue, what are the benefits to the States?
a)As
against a total devolution of Rs. 3.48 lakh crore approximately in 2014-15, the
total devolution to the States in 2015-16 will be Rs. 5.26 lakh crore
approximately, a year-on-year increase of Rs. 1.78 lakh crore approximately
b)"The
higher tax devolution will allow States greater autonomy in financing and
designing schemes as per their needs and requirements,"
c)
Practically, it will give more power to states in determining how they spend
this money.
d)All the
above
Ans : d
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