Govt. agrees to maintain States’ share in the divisible pool of taxes

12.5% weightage for demographic performance of southern States in tax-transfer calculations

Published - February 01, 2021 10:46 pm IST - NEW DELHI:

15th Finance Commission Chairman NK Singh addressing press conference after his meeting with Madhya Pradesh Government, in Bhopal on Thursday.

15th Finance Commission Chairman NK Singh addressing press conference after his meeting with Madhya Pradesh Government, in Bhopal on Thursday.

The government has accepted the Fifteenth Finance Commission’s recommendation to maintain the States’ share in the divisible pool of taxes to 41% for the five-year period starting 2021-22, and given an ‘in-principle’ nod to the panel’s suggestion to set up a separate non-lapsable fund for defence and internal security modernisation.

The Fourteenth Finance Commission had raised States’ share to 42% of divisible revenues, but the Fifteenth Finance panel had reduced the share to 41% in its interim report for 2020-21, citing the conversion of Jammu, Kashmir and Ladakh into Union Territories.

The Commission’s report, which was submitted to the President in November but tabled in Parliament on Monday with the government’s action taken report on its suggestions, has recommended additional revenue deficit grants of ₹2.94 lakh crore for 17 States over the next five years. The government has accepted this recommendation as well as the panel’s suggestion to enhance State’s borrowing ceilings in 2021-22.

“I have provided, on the Commission’s recommendation, ₹1,18,452 crore as Revenue Deficit Grant to 17 States in 2021-2022, as against ₹74,340 crore to 14 States in 2020-2021,” Finance Minister Nirmala Sitharaman said in her Budget speech for 2021-22, terming the government’s acceptance of the 41% vertical share for States recommended by the Commission as a sign of its commitment to fiscal federalism.

“In accordance with the views of the 15th Finance Commission, we are allowing a normal ceiling of net borrowing for the States at 4% of Gross State Domestic Product (GSDP) for the year 2021-2022. A portion of this ceiling will be earmarked to be spent on incremental capital expenditure,” she added.

An additional borrowing ceiling of 0.5% of GSDP will also be provided based on meeting specified reforms in the power sector. States are expected to reach a fiscal deficit of 3% of GSDP by 2023-24, and maintain that level till 2025-26, as per the Commission’s report. The Centre has accepted ‘in-principle’ this quantum of net borrowing ceilings for the States, as per the action taken report.

While the Commission has suggested the additional ceiling for power sector reforms be offered up to 2024-25, the government has said it will examine recommendations related to States’ fiscal road map separately. Similarly, the Commission’s recommendation to overhaul the Fiscal Responsibility and Budget Management law to ensure legislations are in sync with fiscal sustainability frameworks, will be examined separately, the government said.

The Commission, headed by N.K. Singh, has recommended creating a separate non-lapsable fund for modernisation of defence and internal security, a term of reference the Centre had sought its views on. To bridge the gap between defence budget allocations and the projected budgetary requirements, the panel has mooted a fund of ₹2.38 lakh crore for the coming five-year period. It has recommended that ₹1.54 lakh crore of this fund be transferred from the Consolidated Fund of India, partially using receipts from the disinvestment of defence public sector enterprises and land monetisation. The government has said the modalities and sources of funding will be examined in due course.

The Commission has sought to assuage the fears of southern States about losing some share in tax transfers due to the reliance on the 2011 Census data instead of the 1971 census, which could penalise States that did better on managing demographics. It has done so by giving a 12.5% weightage for demographic performance in its tax-transfer calculations.

“The revenue deficit grants proposed for Andhra Pradesh and Kerala are far higher than the previous Commission’s period, while Tamil Nadu has also been earmarked for marginally higher grant on this front,” an official said.

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