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Finance Commission proposes marginal tilt in favour of grants — For equalisation principle between States

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The Chairman of the 12th Finance Commission, Mr C. Rangarajan, presenting the Commission's report to the President, Dr A.P.J. Abdul Kalam, at Rashtrapati Bhavan on Friday. - Kamal Narang

New Delhi , Dec. 17

ECONOMICALLY backward States may have reason to cheer over the recommendations of the 12th Finance Commission. The Commission has, in its report, suggested a marginal tilt in favour of grants in the balance between devolution of taxes and grants, to enable the application of "equalisation principle" between States.

The Chairman of the 12th Finance Commission, Dr C. Rangarajan, submitted the report to the President, Dr A.P.J. Abdul Kalam, here on Friday.

Fiscal experts and certain State Governments had in the past contended that the Centre-State transfers were not progressive enough to address the widening imbalances between States. On the other hand, high-income States (rich States) have been complaining that the Centre-Statetransfer system was punishing them for their performance rather than rewarding them.

Without getting into the details of the recommendations made in the report, Dr Rangarajan told reporters here that States and others should form an opinion on the recommendations of the Commission only after "considering tax devolution and the grants in totality and in terms of what they finally get."

He said the 12th Finance Commission had in its report addressed all the issues referred to it including tax devolution, grants, debt relief, restructuring of public finances, flow of funds to urban and local bodies and the requirements for calamity relief.

On whether States would get a higher share in the divisible pool of taxes, Dr Rangarajan declined to get into details and said the recommendations can be known when the report is made public.

Asked whether recommendations have been made on the fiscal responsibility of States, Dr Rangarajan said there was a separate chapter in the report that dealt with the restructuring of public finances, both at the Central and States level. "We have, in this chapter, set milestones to be achieved by the Centre as well as the States," he said.

On taxation of services, Dr Rangarajan said the Constitutional amendment effected last year was yet to come into force. "Service tax is currently part of the divisible pool of taxes. We have made some recommendations on service tax," he said.

The Finance Commission convenes every five years to determine the sharing of revenues between the Centre and the States. It recommends allocation of tax shares and grants. The report submitted on Friday relates to the five-year period starting from April 1, 2005.

States derive revenues from own sources and Central transfers (shared taxes and grants). Poor States are more reliant on Central transfers as they account for over 50 per cent of the revenues of such States. The largest of the Central transfers comes from the Finance Commission transfers.

The 12th Finance Commission was to have submitted its report by July 2004. Its term was however extended till December on account of the general elections.

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