Cabinet likely to consider changes in terms of reference of 15th finance panel

The Cabinet is likely to consider an addendum to the Terms of Reference (ToR) for the 15th Finance Commission next week. The two new Union Territories of Jammu & Kashmir and Ladakh will be added to its reference.

It is also expected that the Commission will be given a second extension as its term comes to an end on November 30. The Commission will make recommendations for devolution of taxes and other fiscal matters for five fiscal years commencing April 1, 2020.

October 31 was the appointed day for Jammu & Kashmir and Ladakh to become two new Union Territories. Till then Ladakh was part of Jammu & Kashmir which was a State. Since the Finance Commission’s recommendation on devolution is meant only for States and as Jammu & Kashmir ceased to be State from Thursday, there was a need to change the terms of reference.

“The proposed changes will need to get the nod from the Cabinet. Then, these will be sent to the President for final approval and he, in turn, will make a reference,” a senior Government official told BusinessLine . The Cabinet is expected to meet next week.

Section 83 of the Jammu and Kashmir Reorganisation Act, 2019 provides, “on the appointed day, the President shall make a reference to the Fifteenth Finance Commission to include Union territory of Jammu and Kashmir in its Terms of Reference and make award for the successor Union Territory of Jammu and Kashmir.” Normally grants for a Union Territory are provided by the Home Ministry.

States and UTs

The whole issue of Finance Commission’s award for State and Union Territories was debated in details by 11th Finance Commission (2000-2005) and the matter went to Law Ministry for an explanation in this regard. In its advice to Finance Ministry, the Law Ministry made a clear distinction between ‘State’ and Union Territories.

“The word ‘State’ used in Part XII of Chapter I of the Constitution, in Articles 268, 269 and 270, the word ‘Union Territory’ has been used apart from the word ‘State’. Moreover, there are no Consolidated Fund or Contingency Fund for the Union Territories.

None of the Finance Commissions have given any recommendations on the distribution of net proceeds of the taxes to the Union Territories so far. In Article 280, the word ‘State’ has been used to lay stress that it excludes Union Territories. Since all the Union Territories are administered by the President and, therefore, it is distinctly separated from the States,” the advice by Law Ministry to Finance Ministry reads.

More time

Since the Commission has very little time to consider and accordingly recommend on the new references, there is a possibility that it might be given another extension. Another option is that the Commission could suggest two awards, one for one year and another for four years. However, there is no clarity on how many extensions can be given.

The Finance Commission is constituted by the President under Article 280 of the Constitution mainly to give recommendations on distribution of tax revenues between the Union and the States and amongst the States themselves.

Commission’s work

Two distinctive features of the Commission’s work involve redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the Centre and the States respectively and equalisation of all public services across the States.

The recommendations relating to distribution of Union Taxes and Duties and Grants-in-aid fall in this category and are implemented by an order of the President. Other recommendations made by the Finance Commission, as per its Terms of Reference, are implemented by executive orders.

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