Tax devolution to States remains challenge for 15th Finance Commission, too

Do we need a Finance Commission or not? There has been much debating on this of late, as the nation faces a ‘committee fatigue’, and there are questions on whether it is an ‘apolitical’ body and remains so in letter and spirit, given its restricted terms of reference.

Reacting to these comments, NK Singh, who heads the 15th Finance Commission, told a select gathering of editors here on Wednesday that though the Commission is an ‘old creature’, the latest one has some firsts attached to it. For instance, it is the first to be set up after the abolition of the Planning Commission, and the first with no Plan and non-Plan expenditures. It is also the first after the GST rollout.

Singh and his team want to finish the consultation process by this year, as they have to submit the report by October 2019. “It is our intention to complete the State level consultations substantially this year itself…some States may be slightly staggered with elections likely to take place — we will take into account the convenience of the States,” he said.

The task may not be very easy, as the basis of data and resource sharing with States remains a challenge.

The sharing of resources, and the kind of flexibility the 15th Finance Commission may have when deciding on it, are widely debated about.

A senior official in the know said: “If you read the terms of references of this Commission, there is one very specific term which allows it to revisit recommendation of the 14th Finance Commission — revisit not necessarily by altering it, but by reviewing it.”

Terms of reference

The terms of reference reads that while making recommendations, the Commission shall study “the impact on the fiscal situation of the Union government of substantially enhanced tax devolution to the States following the recommendations of the 14th Finance Commission, coupled with the continuing imperative of the national development programme including New India - 2022.”

As the Commission sets out to review the finance, deficit, debt levels, cash balances and fiscal discipline levels of the Centre and States, it has also been mandated to examine whether revenue deficit grants need to be provided, measure the impact of GST and abolition of a number of cesses, and earmarking thereof for compensation to the States.

So, the 15th Finance Commission will examine it, the official added. But does this mean it also has powers to cap the number of cesses levied? Another official said cesses and surcharges are out of the purview of the Commission, but it may do a study on their legal framework.

The data challenge

Agreeing that data remains a challenge, the official said: “It has been a challenge for other Commissions also. It is true that given the fact that there is discontinuity in the work of the Commission, a lot of data gathered is difficult to get...accuracy verification of data will also be a challenge.”

The Commission will be depending on some obvious sources like the RBI, State governments and other traditional sources. In fact, for population, the Commission will be looking at the census data of 2011. This has led to fear among some States that the base year could be loaded against them.

On the uncertainties that GST collections is creating, the official said: “The revenue receipts under GST is very important from the point of view of the Commission. It is important to know the expenditure commitments of the Centre and the States and also the revenues of both.”

“This year, GST revenues may not reflect the appropriate picture to take a view and make projections for 2020-25. But, next year, the Commission has to give the report in October 2019 with GST revenues in 2018-19, which will be available by May. That will guide the Commission, presenting a more realistic picture,” the official pointed out.

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