14th Finance Commission

The government constituted 14th Finance Commission under the chairmanship of former RBI Governor Y. V. Reddy.

The other members of the Commission are

  1. Former Finance Secretary Sushma Nath,
  2. NIPFP Director M. Govinda Rao,
  3. Planning Commission Member Abhijit Sen and
  4. Former Acting Chairman of National Statistical Commission, Sudipto Mundle.

The five-member panel is to submit its report by October 31, 2014.

Term of Reference:

a) The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the States of the respective shares of such proceeds,

b) The principles which should govern the grants-in-aid out of the Consolidated Fund of India,

c) The measures needed to augment the Consolidated Fund of a State to supplement the resources of the panchayats and municipalities in the State, and

d) To look into the need for insulating the pricing of public utility services like drinking water, irrigation, power and public transport from policy fluctuations through statutory provisions

e) To review the state of finances, deficit and debt levels of the Centre and States, keeping in view, in particular, the fiscal consolidation roadmap recommended by the 13th Finance Commission

f) To suggest measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth

TAX DEVOLUTION TO BE BASED ON AREA, POPULATION, DEMOGRAPHY, INCOME DISTANCE & FOREST COVER
Highest weight of 50 per cent is given to distance from the highest per capita income district, followed by population (1971 census) at 17.5 per cent, demography (2011 census) at 10 per cent, area at 15 per cent and forest cover at 7.5 per cent

CENTRE’S FISCAL AND REVENUE DEFICITS
Fiscal deficit should come down to 3.6 per cent of GDP in 2015-16 from projected 4.1 per cent in 2014-15 and then 3 per cent in following year and kept at that for three more years. Not different from existing roadmap, though the present time frame ends in 2016-17. Wants revenue deficit to come down from 2.9 per cent in FY15 to 2.56 per cent in FY16 and then progressively reduce to 0.93 per cent by 2019-20

STATES’ FISCAL AND REVENUE DEFICITS
Fiscal deficit should be at 2.76 per cent in FY16, to come down to 2.74 per cent by FY20 though it would increase in between. To be revenue surplus in all these years

CENTRE’S DEBT
To come down from 45.4 per cent of GDP in FY15 to 43.6 per cent in FY16 and then progressively should reduce to 36.3 per cent by FY20

STATES’ DEBT
Projected to increase from 21.90 per cent in FY16 progressively to 22.38 per cent in FY20

NATIONAL SMALL SAVING FUND (NSSF)
States be taken away from operation of NSSF with effect from next financial year

CONSOLIDATED SINKING FUND
Examine the possibility of setting up of CST for amortisation of debt of the Union govt

RAIL TARIFF AUTHORITY
Replace the advisory body with a statutory body, through necessary amendments to the Railways Act, 1989.

ADVERTISEMENT TAX
States should empower local bodies to impose this tax to augment their revenues

BOOST FOR STATES’ SHARE IN NET PROCEEDS OF TAX REVENUES
The commission has recommended states’ share in net proceeds of tax revenues be 42 per cent, a huge jump from the 32 per cent recommend by the 13th Finance Commission, the largest change ever in the percentage of devolution. As compared to total devolutions in 2014-15, total devolution of states in 2015-16 will increase by over 45 per cent

TAX DEVOLUTION BE PRIMARY ROUTE OF TRANSFER OF RESOURCES
The panel has recommended tax devolution be the primary route of transfer of resources to the states; the government has accepted the recommendations keeping in mind the spirit of National Institution for Transforming India (NITI)

GRANTS FOR LOCAL BODIES BE BASED ON 2011 POPULATION
The commission has recommended distribution of grants to states for local bodies using 2011 population data. Grants will be divided into two broad categories on the basis of rural and urban population – (i) a grant constituting gram panchayats and (ii) a grant constituting municipal bodies

GRANTS BE IN TWO PARTS – BASIC AND PERFORMANCE
The panel has recommended the grants to states for local bodies be in two parts, a basic grant and a performance grant. The ratio of basic to performance grant is 90:10 with respect to panchayats and 80:20 in the case of municipalities.

GRANTS TO GRAM PANCHAYATS & MUNICIPALITIES
The total grants recommended by the commission are Rs 2,87,436 crore for a five-year period from April 1, 2015 to March 31, 2020. Of this, Rs 2,00,292.20 crore will be given to panchayats and Rs 87,143.80 crore to municipalities. The transfers for financial year 2015-16 will be Rs 29,988 crore

STATES’ SHARE IN DISASTER RELIEF SHOULD STAY UNCHANGED
The Commission has said, with regard to disaster relief, the percentage share of states will continue to be as before and follow the existing mechanism. This will be to the tune of Rs 55,097 crore. After implementation of GST, the recommendations of the panel on disaster relief would be implemented

POST-DEVOLUTION REVENUE DEFICIT GRANTS FOR STATES
The panel has recommended ‘post-devolution revenue deficit grants’ for a total of Rs 1,94,821 crore on account of expenditure requirements of the states, tax devolution and revenue mobilisation capacity of the states. These grants will be given to 11 states.

SOME CENTRAL SCHEMES BE DE-LINKED
Eight centrally sponsored schemes will be delinked from support from the Centre. Various centrally sponsored schemes will now see a change in sharing pattern, with states sharing a higher fiscal responsibility for implementing the schemes

OTHER RECOMMENDATIONS
The Finance Commission has also made recommendations on cooperative federalism, GST, fiscal consolidation roadmap, pricing of public utilities and public sector undertakings

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