Budget 2021

Tax revenue to States to be kept at 41% for 5 years

KR Srivats New Delhi | Updated on February 01, 2021

Greater focus on grants-in-aid; ₹2.38-lakh crore for Defence modernisation

To maintain the predictability and stability of resources, especially during the current pandemic times, the Fifteenth Finance Commission (FFC), headed by NK Singh has recommended that the vertical devolution be retained at 41 per cent for the next five years (2021-26)— the same level as in its report for 2020-21.

It has placed greater emphasis on augmenting resources of States through grants-in-aid, particularly Revenue Deficit grants (recommended ₹2.95 lakh crore to 17 states over 2021-26).

This latest recommendation on vertical devolution — which forms part of the report (submitted to President in November last year) tabled in Parliament on Monday — is at the same level of 42 per cent of the divisible pool as recommended by the fourteenth finance commission. However, the latest report has made the required adjustment of about 1 per cent due to the changed status of erstwhile State of Jammu & Kashmir into the new Union Territories of Ladakh and Jammu & Kashmir.

Gross tax revenues

Union Finance Minister Nirmala Sitharaman in her Budget speech said that the government has accepted the entire recommendations of the FFC latest report titled “Finance Commission in Covid-19 times—Report for 2021-26”.

In FFC’s assessment, gross tax revenues for 5-year period is expected to be ₹135.2 lakh crore. Out of that, divisible pool (after deducting cesses and surcharges & cost of collection) is estimated to be ₹ 103 lakh crore. Therefore, States’ share at 41 per cent of divisible pool comes to ₹ 42.2 lakh crore for 2021-26 period. Including total grants of ₹10.33 lakh crore and tax devolution of ₹42.2 lakh crore, aggregate transfers to States is estimated to remain at around 50.9 per cent of the divisible pool during 2021-26 period, according to FFC.

Total FFC transfers (devolution + grants) constitutes about 34 per cent of estimated Gross Revenue Receipts of the Union leaving adequate fiscal space for the Union to meet its resource requirements and spending obligations on national development priorities.

Horizontal devolution

On horizontal devolution, FFC has agreed that the Census 2011 population data better represents the present need of States, to be fair to, as well as reward, the States which have done better on the demographic front, XVFC has assigned a 12.5 per cent weight to the demographic performance criterion. FFC has now re-introduced tax effort criterion to reward fiscal performance.

Factoring the extant strategic requirements for national defence in the global context, FFC has, in its approach, re-calibrated the relative shares of Union and States in gross revenue receipts. This will enable the Union to set aside resources for the special funding mechanism that FFC has proposed.

The FFC has recommended that Centre may constitute in the Public Account of India, a dedicated non-lapsable fund, Modernisation Fund for Defence and Internal Security (MFDIS). The total indicative size of the proposed MFDIS over the period 2021-26 is ₹ 2,38,354 crore.

The FFC has called for a major restructuring of the FRBM Act and recommended that the time-table for defining and achieving debt sustainability may be examined by a High-powered Inter-governmental Group. This group craft the new FRBM framework and oversee its implementation, the FFC has said. It is important that the Union and State Governments amend their FRBM Acts, based on the recommendations of the Group, so as to ensure that their legislations are consistent with the fiscal sustainability framework put in place. This High- powered Inter-Governmental Group could also be tasked to oversee the implementation of the FFC’s diverse recommendations, the report added.

The FFC has recommended that health spending by States should be increased by more than 8 per cent of their budget by 2022.

The total grants-in-aid support to the health sector over the award period works out to ₹1.06 lakh crore, which is 10 per cent of the total grants-in-aid recommended by FFC. The grants for the health sector will be unconditional, the FFC has said

Published on February 01, 2021

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