Apart from the customary task of recommending a devolution formula for revenue sharing between the Centre and the States, the Thirteenth Finance Commission (TFC) headed by Vijay Kelkar has drawn up a five-year roadmap for fiscal consolidation. Its recommendations will be reflected in the budget for 2010-11.
Interacting with the media at his office here on the Commission’s report submitted to President Pratibha Devisingh Patil on Wednesday in keeping with its terms of reference, the Commission Chairman said: “We had been asked to suggest [a] new path for fiscal consolidation... We have recommended [the] fiscal path for the next five years (2010-15).” The report, Dr. Kelkar said, also dealt with “sharing of tax revenue between [the] Centre and States, distribution of funds among states and support to local bodies.”
Having strayed from the Fiscal Responsibility and Budget Management (FRBM) guidelines by way of the increased spending and stimulus measures to combat the slowdown in the wake of the global financial crisis, the Centre had specifically directed the Commission to chalk out a strategy for return to fiscal prudence. With a pause button on the FRBM norms for the last couple of years, the Centre’s fiscal deficit, which was already at a high of 6.2 per cent of the GDP (gross domestic product) in 2008-09, is officially estimated to peak further to 6.8 per cent in the current fiscal year.
The contents of the report and the Commission’s recommendations are likely to be made public in February next year, before the presentation of the budget.
The President is to hand it over to Finance Minister Pranab Mukherjee following which the Finance Ministry is to prepare a note for adoption by the Cabinet and subsequently table the report in Parliament during the budget session. Referring to this customary exercise, Mr. Mukherjee said: “There is a system. [The report] will be tabled in Parliament as per the system… [The TFC recommendations] would be getting reflected in the 2010-11 budget.”
In particular, the Commission’s report assumes greater significance as the country’s direct and indirect taxation structure is in for a major revamp in the next two years. While the government is slated to introduce the Goods and Services Tax (GST) from April 1, 2010 — as originally proposed — to subsume the indirect levies such as excise, value added tax (VAT), service tax and other local taxes, the Direct Taxes Code is also under formulation as a replacement of the archaic Income-tax Act, 1961 from 2011.
Apart from taxation issues, the Commission has looked into other matters such as the growing off-budget expenditure — especially, oil bonds — which increase the government’s liability without getting reflected in the budgetary process.
The report has also dealt with more immediate issues such as the implications of environment and climate change, ways to improve outcomes and outputs of public expenditure, and the impact of GST on trade, Dr. Kelkar said, while clarifying that “there’s no recommendation on the tax structure. It’s on the revenue sharing between the Centre and the States ... rates were not talked about, it’s the revenue sharing.”
However, the Commission, Dr. Kelkar pointed out, did give its recommendations on the share that States and Union territories should have in Central taxes, which currently is at 30.5 per cent.
The Central taxes that have to be shared with the states include corporation tax, income tax, wealth tax, customs, excise duty and service tax. Levies such as education and road cesses are not shared. “We have recommended a share, which will be the share between the Centre and the States of the Centrally-collected taxes,” he said.
The report also does not talk about the post-GST scenario as it is based on tax collections in 2008-09. That, however, may not be a major concern as the suggestions are based on revenue neutral rates. “Our assumption is revenue neutral. Fortunately, in GST, both the Centre and the States wanted revenue-neutral rates. There won’t be any impact as rates would be neutral, and the revenue of states and Centre would be protected,” Dr. Kelkar said.
As per the Constitution, the TFC was set up in November 2007 and its term was up to January 2010 with a request to submit its report by December this year so as to give effect to its suggestions in the budget for 2010-11.
Besides Dr. Kelkar, other members of the Commission are: B. K. Chaturvedi, Indira Rajaraman, Atul Sarma and Sanjiv Misra.