The report of the 13th Finance Commission (TFC) has not been made public but it is obvious that it will be comprehensive, encompassing, besides its core area of tax sharing, critical issues such as fiscal consolidation. The Commission was constituted in 2007. In August 2008, the government, faced with the charge of persisting with opaque accounting practices — specifically in treating the burgeoning petroleum and other subsidies as “off-budget” items — asked the TFC to suggest a revised road map with “a view to maintaining the gains of fiscal consolidation through 2010 to 2015.” That additional point of reference has since become critically important in the context of the stimulus packages involving more spending by government. The government is still undecided about the timing of withdrawing the stimulus packages but will obviously be influenced by the TFC’s recommendations. Another area in which the Commission will have a substantial say is in the design of the Goods and Services Tax (GST). The TFC has already made it known that it favours a revenue-neutral, single GST, preferably at 12 per cent, arguing that the relatively low rate will lead to better compliance and boost the GDP by as much as 1.5 percentage points.

The focus of the TFC’s report will be on correcting the growing imbalance in the sharing of tax resources by the Centre and the States. According to a recent estimate by the National Institute of Public Finance and Policy, States raise 34 per cent of the consolidated tax revenues but incur 58 per cent of the expenditure. Further, a significant part of the States’ expenditure is tied to the central expenditure on schemes launched by the Centre. In that category are some of the flagship schemes in the social sector, which has received enhanced budgetary allocation this year. Moreover, since 2003-04 the Centre has been transferring funds directly to the implementing agencies at the district, even village-level, bypassing the State exchequer. Also, the backward States rich in mineral wealth feel discriminated against in the matter of royalties. The TFC can be expected to have addressed these and related issues. But over the years Finance Commissions have been constrained by three factors: expansion in the terms of reference beyond tax devolution; restriction of its scope to non-Plan expenditure; and the emergence of multiple agencies in making transfers.

More In: Editorial | Opinion