With the Centre accepting the recommendations of the Thirteenth Finance Commission (TFC) despite the fiscal stress, States would get 32 per cent of its tax revenue along with Rs. 3.19 lakh crore as grant for the next five fiscal years (2010-15).

In effect, this means an increase of 1.5 percentage point in the tax revenue share for States from the Centre’s kitty, from the current 30.5 per cent.

Announcing the acceptance of the recommendations after tabling the report of the Commission headed by Vijay Kelkar in Parliament, Finance Minister Pranab Mukherjee said: “Despite the fiscal stress being faced by the Centre, the government has accepted the major recommendations of the Finance Commission keeping in mind the larger interests of the federal polity.”

Mr. Mukherjee pointed out that the recommendations of the Commission on revenue sharing between the Centre and States amounted to a “substantial step-up over the recommendations of the 12th Finance Commission.” Apart from laying down the tax devolution formula, he said the Commission asked the government to extend specific grants, such as Rs. 24,000 crore for elementary education and Rs. 15,000 crore for environment.

Alongside, for strengthening the local bodies, it suggested that the government earmark Rs. 87,000 crore exclusively for them. “For the first time, local bodies — urban and rural — are getting a percentage share of Union taxes,” Mr. Mukherjee said.

As per the recommendations of the previous Commission, the Centre had provided for a total of Rs. 1,64,361 crore as the States’ share in taxes and duties in the Budget for 2009-10. In the previous Budget, while the provision was for Rs. 178,765 crore, the actual transfer was estimated at Rs. 1,60,179 crore.

The Commission also recommended “a calibrated exit strategy” from the expansionary fiscal stance of 2008-09 and 2009-10. Commenting on the suggested roadmap for fiscal consolidation, Mr. Mukherjee said: “The Centre and the State governments will benefit from these recommendations.”

Following the stimulus packages which were put in place to help the industry in combating the impact of the global financial crisis, the Centre’s fiscal deficit has been budgeted at 6.8 per cent of the GDP during the current fiscal as compared to 6.2 per cent in 2008-09. The TFC has targeted for a fiscal deficit at three per cent by 2013-14 from the current level, and has called for elimination of the revenue deficit by the same year from about 4.8 per cent this fiscal.

In its recommendations on the implementation of the proposed Goods and Services Tax (GST) which was originally slated for rollout from April 1, 2010, the Commission has suggested earmarking Rs. 50,000 crore for the revenue losses that the States may incur when the new indirect tax regime comes into force.

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