Fourteenth Finance Commission Recommendations on Sharing of Union Tax Revenues


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

The 14th Finance Commission (FC), a constitutional body set up every five years to define union-state financial relations and whose report was released February 2015, departs radically from past FCs in its approach. It rebalances the respective roles of the Union and States in economic and fiscal management by recognizing the capacity and potential of differential development models across the country; the related need for according larger policy discretion to the federation’s units; and preserving the overarching policy responsibilities of the Union in terms of overall macroeconomic management.
The total grant recommended was Rs. 2,87,436 crore for a five-year period. Out of which, the grant to panchayats was Rs.2,00,292 crore. And, the reminder goes to municipalities.It has chosen to take the entire revenue expenditure for this purpose. Hence, it has decided to take into account a state’s entire revenue expenditure needs without making a distinction between plan and non-plan expenditure. The Commission is of the view that sharing pattern in respect to various Centrally-sponsored schemes need to change. It wants the States to share a greater fiscal responsibility for the implementation of such schemes.
The table1 blow shows the criteria and weights assigned for inter-se determination of the shares of taxes to the States.
Table 1: Criteria and Weights
Criteria                           Weight (per cent)
Population                                   17.5
Demographic Change                 10
Income Distance                         50
Area                                            15
Forest Cover                              7.5
 
State-specific share of taxes is presented in Table 2 as follow-
Table 2: Inter-se Share of States
  States                       Share of States (per cent)
Andhra Pradesh                     4.305
Arunachal Pradesh                1.370
Assam 3.311 Bihar               9.665
Chhattisgarh                       3.080
Goa                                     0.378
Gujarat                                3.084
 Haryana                            1.084
 Himachal Pradesh           0.713
 Jammu & Kashmir          1.854
Jharkhand                        3.139
 Karnataka                      4.713
 Kerala                            2.500
 Madhya Pradesh            7.548
 Maharashtra                  5.521
 Manipur                        0.617
 Meghalaya                   0.642
 Mizoram                      0.460
 Nagaland                     0.498
Odisha                          4.642
Punjab                         1.577
Rajasthan                    5.495
Sikkim                       0.367
Tamil Nadu               4.023
Telangana                  2.437
Tripura                      0.642
Uttar Pradesh            17.959
Uttarakhand              1.052
 West Bengal              7.324
 All States                 100.000
As service tax is not levied in the State of Jammu & Kashmir, proceeds cannot be assigned to this State. We have worked out the share of each of the remaining twenty-eight States in the net proceeds of service taxes and presented this in Table  If the service tax starts to be levied in Jammu & Kashmir during the award period of this Commission, the share of each State will be in accordance with Table 2. If in any year during our award period, any tax of the Union is not levied in a State, the share of that State in the tax should be considered as zero and the entire proceeds of that Union tax should be distributed among the remaining States by proportionately adjusting their shares.
Following table shows the share of States Other than Jammu & Kashmir in Service Tax -
 Table 3:
States                         Share of States (Per cent)
 Andhra Pradesh                     4.398
 Arunachal Pradesh                1.431
Assam                                    3.371
 Bihar                                     9.787
Chhattisgarh                           3.166
Goa                                         0.379
 Gujarat                                   3.172
 Haryana                                 1.091
 Himachal Pradesh                  0.722
Jharkhand                               3.198
 Karnataka                             4.822
Kerala                                   2.526
Madhya Pradesh                    7.727
Maharashtra                           5.674
 Manipur                               0.623
 Meghalaya                           0.650
Mizoram                              0.464
 Nagaland                           0.503
 Odisha                               4.744
 Punjab                               1.589
Rajasthan                            5.647
Sikkim                               0.369
Tamil Nadu                       4.104
 Telangana                         2.499
 Tripura                             0.648
Uttar Pradesh                    18.205
 Uttarakhand                      1.068
West Bengal                      7.423
All States                           100.000 97
Major  Recommedations on Sharing of Union Tax Revenues are-
- The share of tax devolution to the states to be increased to42 per cent of the divisible pool. It would serve the twin objectives of increasing the flow of unconditional transfers to the States and yet leave appropriate fiscal space for the Union to carry out specific purpose transfers to the States.
- Not consented to the submission of States on minimum guaranteed devolution.
- Not consented to the submission of States on minimum guaranteed devolution.
- The commission was of the view that the use of dated population data was unfair, it was bounded by its ToR and had assigned a 17.5 per cent weight to the 1971 population. On the basis of the exercises conducted, it concluded that a weight to the 2011 population would capture the demographic changes since 1971, both in terms of migration and age structure. It, therefore, assigned a 10 per cent weight to the 2011 population.
- For area, the commission has followed the method adopted by the 12th Finance Commission and put the floor limit at 2 per cent for smaller States and assigned 15 per cent weight.
- The commission believed that a large forest cover provides huge ecological benefits, but there is also an opportunity cost in terms of area not available for other economic activities and this also serves as an important indicator of fiscal disability. It has assigned 7.5 per cent weight to the forest cover.
- The Commission has decided to revert to the method of representing fiscal capacity in terms of income distance and assigned it 50 per cent weight. It has  calculated the income distance following the method adopted by 12th Finance Commission.
Background
The Fourteenth Finance Commission (FC-XIV) was constituted by the President under Article 280 of the Constitution on 2 January 2013 to make recommendations for the period 2015- 20.  Y. V. Reddy was appointed the Chairman of the Commission. Ms. Sushama Nath,  M. Govinda Rao and Sudipto Mundle were appointed full time Members. Prof. Abhijit Sen was appointed as a part-time Member.  Ajay Narayan Jha was appointed as Secretary to the Commission .
Article 280 (3) (a) of the Constitution and para 4 (i) of the terms of reference (ToR) mandated us to make recommendations regarding "the distribution between the Union and the States of the net proceeds of taxes, which are to be, or may be, divided between them" as well as the allocation between the States of the respective shares of such proceeds.
The 14th Commission considered six factors in determining the approach to sharing of Union taxes: (i) the Constitutional provisions and intent; (ii) the approaches of the previous Finance Commissions; (iii) the need for continuity, to the extent possible; (iv) the requirement for rebalancing in the sharing of resources needed in the context of overall fiscal relations; (v) the anticipated macroeconomic environment during the award period; and (vi) the views of the Union and State Governments in the macroeconomic context of our award period. The challenge we faced was to weigh the arguments by the Union and States advanced before us and attempt appropriate rebalancing to meet the evolving circumstances. Vertical Devolution
 The main task of the FC-XIV was to make a realistic estimate of the vertical imbalance of resources between the Union and the States.
 

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Thursday, 01st Jan 1970, 12:00:00 AM