In this article we will discuss about the first twelve finance commissions of India and their recommendations.
1. First Finance Commission of India:
The First Finance Commission of India was appointed by the President of India on 20th November, 1951, which was Chaired by Mr. K.C. Neogy. Other members of the Commission included Mr. V.P Menon, Mr. R. Kaushalendra Rao, Dr. B.K. Madan and Mr. M.U. Rangachari. After the resignation of Mr. V.P. Menon, Mr. Y.L. Mehta was appointed as member.
The Commission was asked to make recommendation on modalities for sharing income tax and union excise duties and matters related to grants-in-aid.
(a) The share of States in the proceeds of income tax was to be 55 per cent and that of union excise duties be 40 per cent (3 commodities), 25 per cent (8 commodities) and 20 per cent (35 commodities) respectively.
(b) Regarding Horizontal Distribution, overwhelming weightage is given to population (80%) and rest (20%) on to extent of contribution.
(c) Grants-in-Aid were provided (under Article 273) to only four states, i.e., Assam, Bihar, Odisha and West Bengal. However, grants were provided to many states under substantive position of Article 275(1) and under the head of Primary education grants.
2. Second Finance Commission of India:
The Second Finance Commission was constituted by President Rajendra Prasad on 1st June, 1956. The Commission was chaired by Mr. K. Santhanam and consisted of Mr. Ujjal Singh, Mr. L.S. Misra, Mr. M.V. Rangachari and Dr. B.N. Ganguli as its other members.
The Commission was asked to make recommendations on matters related to Grants-in-aid to certain states under Article 275; allocation of revenue from Estate duty and Tex on Railway Passenger fares; principles governing distribution under article 269 of the net proceeds of estate duty in respect of property other than agricultural land; revision of rate of interest on loans made by the centre; apportionments of net proceeds of additional excise duties proposed to be levied.
Regarding the distribution of Income Tax, the Commission recommended an increase in the per cent of the net proceeds to the states from 55 to 60 per cent had the share of Union Territories should be 1 per cent.
Secondly, the Commission recommended that the distribution of the share of Income Tax among the states should be 10 per cent on the basis of collection and 90 per cent on the basis of population. Again allocation to the states from the Union duties of Excise should be 25 per cent on matches, tobacco, vegetable products, tea, coffee, sugar, paper and vegetable non-essential oil.
3. Third Finance Commission of India:
The Third Finance Commission was constituted in I960 for the period 1962-66 by the President of India. The Commission was chaired by Shri A.K. Chanda and its members were Shri Govinda Menon, Sri Dwijendra Nath Roy, Prof. P.V. Mathur, Shri G.R. Kamath, Member Secretary.
The Commission was asked to make recommendations to the President on matters related to tax sharing between the centre and states and allocation of Income Tax and Central Excise Duties, Grants-in-aid to states, requirements of Third Five Year Plan, allocation additional excise duty and estate duty and manner of distribution of Ad-hoc Grants in lieu of tax or Railway Passenger Fares.
The Commission recommended formation of an independent Commission to assess the tax potential of each state, to review the tax structure and to recommend rates under different heads of the levies of the state list. Regarding the divisible pool of income tax among the states, the FC again adopted the criterion of the First F.C. i.e. 80% on the basis of population and 20% on the basis of collection.
Regarding the distribution of proceeds of Union Excise Duties (UED) the FC decided to cover all commodities on the existing list and recommended 20% of net proceeds of UED on all commodities should be allocated to the state and their share be determined on the basis of population. The Commission adopted the principle of compensation for the distribution of grants.
4. The Fourth Finance Commission of India:
The Fourth Finance Commission was constituted by the President of India on 18th May 1964 under the chairmanship of Dr. P.V. Rajamannar. Other members of the Commission include Shri Mohan Lai Gautam, Shri. D.G. Karve, Prof. Bhabatosh Dutta and Shri P.C. Mathew as Member Secretary.
The Commission suggested for establishing greater coordination between the centre and the states. It also recommended modalities for tax sharing and allocation of Income Tax and Union Excise Duties and for grants-in-aid to states. It also studied the combined incidence of Sales Tax and Union Excise Duties on the production, Consumption or export.
5. The Fifth Finance Commission of India:
The Fifth Finance Commission was constituted by the President of India on 15th March 1968 under the chairmanship of Shri Mahaveer Tyagi. The terms of reference of the Commission were wider than those of earlier ones. The Commission was asked to examine the desirability or otherwise of maintaining the existing arrangements in regard to additional excise duties levied in lieu of Sales Tax and the scope for extension of such arrangements to other items.
It was also asked to inquire into the unauthorized overdrafts of the states and recommend the procedure for avoiding such overdrafts and also to examine the scope for raising revenue from taxes and duties mentioned in Article 269 and from their own resources for better fiscal management and economy in expenditure.
The Commission was asked for the first time to indicated the basis of its findings and make available relevant information.
6. The Sixth Finance Commission of India:
The Sixth Finance Commission was incorporated in the year 1972 under the chairmanship of Shri K. Brahman and Reddi as the Chairman. Other members include Shri Justice Syed Sadat Abal Masud, Dr. B.S. Minhas, Dr. I.S. Gulati and Shri G. Ramachandran as Member Secretary.
Considering the states demand for the inclusion of corporation tax into the divisible income tax and allocation of net proceeds to them, the Commission expressed that such inclusion was constitutionally forbidden but it can be reviewed by the National Development Council. The Commission also increased the States share from 75 to 80 per cent due to decrease in the divisible pool as the arrears of the advance tax collection had been cleared.
In view of the increasing integration of the national economy and for eliminating the regional imbalances, the “contribution” factor was kept at 10 per cent in the distribution of share amongst the states. The distribution inter se the states should be on the basis of fixed percentages. Moreover, the Commission recommended that out of the net proceeds of the income tax, 1.79 per cent should be allocated to the Union Territories.
7. The Seventh Finance Commission of India:
The Seventh Finance Commission of India was constituted in the year 1977 with Shri. J.M. Shelat as the Chairman. Other members includeâ€”Dr. Raj Krishna, Dr. C.H. Hanumantha Rao, Shri H.N. Ray and Shri V.B. Eswaran as Member Secretary.
The Commission recommended that the share of the states in the net proceeds should be raised to 85 per cent whereas the share of Union Territories would be 2.19 per cent of net proceeds. However, the inter se distribution between the states should include 10 per cent as contribution factor and the rest 90 per cent would be determined on the basis of population.
The 10 per cent allotment would be based on the state wise net assessments.
8. The Eighth Finance Commission of India:
The Eighth Finance Commission of India was constituted in the year 1983 under the chairmanship of Shri Y.B. Chavan. Other members wereâ€”Shri Justice Sabya Sachi Mukherjee, Dr. C.H. Hanumantha Rao, Shri G.C. Baveja, Shri A.R. Shirali, Shri Justice T.P.S. Chawla and Shri N.V. Krishnan as Secretary.
The Commission was asked to recommend on the distribution of net proceeds of taxes between the union and the states and allocation between states of the respective shares of the same. The Commission was asked to determine the principle which governs the grants-in-aid to the states out of the Consolidation Fund of India and the amount to be paid to needy states.
The Commission was asked to examine the possibility of increasing revenue from taxes and duties mentioned in the article 269 of the constitution but were not levied till that. The Commission was asked to review the policy and arrangement related to financing of relief expenditure by the states affected by natural calamities and also make appropriate suggestions.
The major objective of the Commission was to reduce interstate disparities through the scheme of devolution. The Commission recommended to retain the share of states in the proceeds of the income tax at 85 per cent level. It also recommended withdrawal of surcharge on income tax from 1985-86.
The Commission recommended to increase the share of states in the net proceeds of union excise duties from 40 to 45 per cent and the entire proceeds of additional excise duties on sugar, textiles and tobacco should be distributed among the states, keeping provision for union territories.
In respect of grants in aid the Commission made it more flexible and provided for an annual growth 5 per cent in respect of the amount of grants payable. The Commission also recommended to write off a substantial portion of state loan amounting 22,853.9 million while is considered an important step towards strengthening the state finances.
9. The Ninth Finance Commission of India:
The Ninth Finance Commission of India was constituted in the year 1987 under the chairmanship of Mr. N.K.R Salve and along with following membersâ€”Shari Justice Abdus Sattar Qureshi, Dr. Raya J. Cheiliah, Shri Lai Thanhawla, Shir Mukesh Prasad, Shri S. Venkitaramanan, Shri R. Keishing and Shri K.V.R. Nair.
The Commission was asked to adopt a normative approach in assessing the receipts and the expenditures on the revenue account both for the states and the centre with regard to the special problems of each state and the special requirement of the centre. Changes in the principles that govern the distribution between the union and the states and also the states inter se of the net proceeds of central taxes are to be made.
The Commission recommended to retain the share of states in the proceeds of income tax at 85 per cent level. The Commission also retained the share of states in the net proceeds of shareable Union excise duties to 45 per cent. In order to make recommendation about grants-in-aid, the Commission decided not to go by earlier principles.
Thus it recommended the amount grants in aid not to fill the budgetary gaps of the states but to meet their fiscal needs as represented by the difference between normatively determined revenue receipts and non-plan expenditures. Under this system states will have greater autonomy and accountability.
The Commission recommended that the loans given to the federating states for drought relief during 1986- 89 as outstanding on 31 March 1989 are to be waived. The Commission also recommended that state plan loans advanced to the states be rescheduled to 15 years in case of all states.
10. The Tenth Finance Commission of India:
The Tenth Finance Commission of India was constituted by the President of India in the year 1992 with Shri Krishna Chandra Pant and Chairman and along with four other members, namely, Shri Debi Prasad Pal, Shri, B.P.R. Vithal, Shri C. Rangarajan and Shri M.C. Gupta as Member Secretary. The report of the Commission recommended a substantial increase in transfers to the states.
(i) Share of Income Tax:
The TFC recommended the reduction of states’ share of income tax from 85 per cent (as recommended by Eighth and Ninth F.C.) to 77.5 per cent showing a decline by 7.5 per cent. Again TFC included the interest recoveries and penalties on income tax in the divisible pool. The TFC recommended to transfer 29 per cent’ of the total divisible pool which includes all central taxes like corporation tax, customs, wealth tax, gift tax and service tax.
(ii) Sharing Union Excise Duties:
The TFC recommended that the States’ share in the net proceeds of union excise duties to be raised to 47.5 per cent as compared to that of 45 per cent recommended by Ninth EC. 2.5 per cent additional share recommended by TFC was mainly advanced to compensate the reduced share of income tax.
Out of the 47.5 per cent of the shares of the states, 40 per cent would be distributed among the states using the same criteria adopted for distributing income tax and the remaining 7.5 per cent would be distributed among the deficit states.
(iii) Sharing Additional Excise Duties:
The total net proceeds of additional excise duty on sugar, textiles and tobacco are distributed among the states. The Ninth F.C. (NFC) recommended that 50 per cent of the proceeds be distributed among the states on the basis of population and the remaining 50 per cent on the basis of State Domestic Product (SDP) so as to determine the share of each state in its proceeds.
The TFC recommended that 50 per cent of additional excise duty be distributed on the basis of population, 40 per cent on the basis of SDP and 10 per cent on the basis of state sales tax collection.
(iv) Grants in lieu of Tax on Railway Fare:
As per the requests of the states to raise the share of 10.7 per cent of the non-suburban passenger earnings in respect of grant in lieu of tax on passenger fares, the TFC fixed the annual grant at Rs 380 crore (10.7% of Rs 3,450 crore in 1992-93) to be given to the states for the period 1995-2000.
Under Article 275 of the constitution, deficit states are to get unconditional transfer of resources in the form of grants-in-aid from the centre so as to perform their functions smoothly. The TFC recommended Rs 7,583 crore grants-in-aid to such states for meeting their special requirement.
TFC has also provided grants-in-aid in some other forms as follows:
(a) Upgradation Grants:
The TFC recommended a special upgradation grant of Rs 2,610 crore to all states to solve their special problems as well as for upgradation and modernisation of district administration services like police, fire service, jails, record rooms, treasuries, computerisation of land records, faster channel of communications etc.
(b) Education Grants:
Additional grants were provided for the promotion of girls’ education, additional facilities for upper primary schools and drinking water facilities in primary schools.
(c) Grants for Local Bodies:
The TFC for the first time recommended to provide grant to the extent of Rs 5,380 crore to local bodies like municipalities and panchayats etc.
(d) Calamity Relief Fund:
The TFC made recommendation for a contribution of Rs 6,304 crore to Calamity Relief Fund for a period, of five years (1995-2000), out of which seventy five per cent (Rs 4,728 crore) was to be provided by the Centre and the remaining twenty five percent (Rs 1,576 crore) by the States.
The Commission also recommended to establish a National Calamity Relief Fund with a corpus of Rs 700 crore for a five year period (1995-2000) so as to meet the eventualities related to severe calamities. Taking all these four categories of grants, the TFC recommended total grant amounting to Rs 20,300 crore for the entire five year period (1995-2000).
(vi) Debt Position of States:
The TFC was given the authority to assess the debt position of the states and was also asked to recommend measures to reduce fiscal deficit. Accordingly, the TFC has expressed serious concern over the deteriorating debt position of states.
The TFC suggested that the states should make serious efforts to meet the loan repayment and interest obligation of such debt. TFC has recommended a scheme of general debt relief for all states linked to its fiscal performance. TFC has provided special relief to three states with fiscal stress, viz., Bihar, Orissa and U.P.
The commission also provided special loans to Punjab to fight militancy and insurgency and also recommended waiving of one-third of principal amount falling due during 1995-2000 and thereby the total relief was around Rs 490 crore.
The TFC also provided relief to the extent of Rs 44 crore to special category states. In total, the TFC has recommended a debt relief of Rs 701 crore for 1995-2000 period as compared to that of Rs 976 crore and Rs 2,285 crore recommended by Ninth and Eighth Finance Commission respectively.
(vii) Alternative Scheme for Devolution:
The TFC suggested alternative scheme for devolution of resources to the states. Accordingly, it was suggested that states get shares from the gross receipts of all types of central taxes, instead of present system of sharing only from income tax and excise duty only. The TFC further suggested that 29 per cent of gross receipts from all central taxes be distributed among the states. This system would be subject to review after every 15 years.
In conclusion, it is observed that the TFC has offered a good set of important suggestions related to devolution of resources from the centre to the states.
Some of its suggestions like up gradation grants, financial assistance to local bodies, setting up of National Calamity Relief Fund, alternative schemes of devolution of resources need special mention. However, the recommendations of TFC are also not free from some shortcomings.
(i) TFC failed to take into account the likely increase in the volume of expenditure of the Central Government after the implementation of Fifth Pay Commission Report and its fall out on the states.
(ii) TFC failed to enforce financial discipline among the states.
(iii) TFC made an unrealistic estimate of the volume of subsidies.
(iv) TFC also failed to offer any realistic suggestion to check evasion of taxes.
However, considering the complete report, it is observed that the report of the TFC is beneficial and useful as compared to the reports of earlier commissions.
11. Eleventh Finance Commission Report (2000-2005):
The Eleventh Finance Commission constituted by the President on July 3, 1998 with Prof. A.M. Khusro as its Chairman and Mr. Amaresh Bagchi, Mr. M.C. Jain, Mr. J.C. Jetli, Mr. T.N. Srivastava, Mr. D.K. Srivastava and Mr. K.M. Thomas.
The seven member commission has been directed to submit its report covering a period of five years (2000-2005) commencing from April 1, 2000. The Eleventh Finance Commission was given the liberty to evolve its own methodology for the purpose.
(i) A lump-sum provision of Rs 11,000 crore in the Central Budget 2000-2001 for revenue deficit grants to States.
(ii) For the period of five years commencing from April 1, 2000, the total share of the States in the net proceeds of Union taxes and duties would be 29.5 per cent.
(iii) Grants totaling to Rs 4,972.63 crore be given towards upgradation of standards of administration and specific grants to certain States for special problems for the five years commencing from April 1, 2000.
(iv) Grants totaling Rs 10,000 crore for local bodies during 2000-2005, to be utilised (except the amount earmarked for maintenance of accounts and audit and for development of database) for maintenance of civic services (excluding payment of salaries and wages). Of this, Rs 1,600 crore per annum is for rural local bodies and Rs 400 crore per annum is for urban local bodies.
(v) Continuance of the existing scheme of Calamity Relief Funds in States with an aggregate size of Rs 11,007.59 crore during 2000-2005. This includes the Centre’s share of Rs 8,255.69 crore, and the States’ share of Rs 2,751.90 crore. Discontinuation of the existing National Fund for Calamity Relief.
The Central assistance to the States in national calamities should be financed by levy of a special surcharge on the central taxes for a limited period and to be kept in a separate fund, to be known as National Calamity Contingency Fund, created in the Public Account of the Government of India.
(vi) In deciding the total quantum of devolution of share in Central taxes/duties to States and grants-in- aid to States, tax devolution and plan/non-plan grants from the Centre to the States should not exceed 37.5 per cent of total Centre’s revenues, both tax and non-tax.
(vii) Grants-in-Aid under Article 275(1) of the Constitution, amounting to Rs 35,359 crore during 2000- 2005 to be provided to such States (15 States) which will have deficit non-plan revenue account even after the devolution of central tax revenues, equal to the amount of deficits assessed during the period 2000-2005.
(viii) In its Supplementary Report, the majority view had recommended monitor able fiscal reforms programmes for all States.
(ix) For the purpose of drawing up State-specific monitor able fiscal reforms programmes, a monitor able fiscal reforms programme aimed at reduction of revenue deficit of the States is envisaged.
(x) A group designated as Monitoring Agency may be constituted by the Government of India for drawing up State-Specific monitor able fiscal reforms programmes for all States in the context of the broad parameters suggested by the EFC and as accepted by Government of India.
Thus from the aforesaid recommendations, it is observed that EFC has recommended devolution of 28 per cent of the revenue from central taxes to states and has also recommended transfer of additional 1.5 per cent of the net proceeds of Central taxes to those states which do not levy sales tax on sugar, tobacco and textiles, making the total devolution to 29.5 per cent of the net proceeds of Union taxes and duties.
The EFC has also put a cap on the overall Central taxes and non-tax transfers at 37.5 per cent of the gross receipts.
The EFC has also recommended discontinuation of the existing National Fund for Calamity Relief and instead suggested setting up of a ‘National Calamity Contingency Fund’ which would be created with an initial outlay of Rs 500 crore.
The EFC was called upon to recommend measures not only for fair sharing of both tax and non-tax revenue between the Centre and States but also to provide scheme of things that brings down the fiscal deficits attained by both the Centre and the States to the minimum within next five fiscal years.
The report of the Commission accepted by the government at the Centre stressed on the paramount importance of reducing the revenue expenditure drastically and putting a cap on guarantees given by the Centre to the States for borrowings, through an amendment of the constitution.
It has also rightly linked transfer of shareable resources from the Centre to States partly to fiscal discipline and suggesting indexing of user changes by tariff commissions on electricity, railway tariff, administered prices etc. and also to constitute an independent body to regularly revise royalty on minerals.
The EFC suggests that the Centre also, like the States, should go for priority based government expenditure, tightening of expenditure on salaries, pensions, interest payments and subsidies.
Apart from suggesting the taxing of the farm sector and imposition or services tax on a larger scale to improve buoyancy of indirect taxes and amendment of the Constitution to impose professional tax, the Commission has recommended the discontinuance of the National Calamity Fund and setting up of National Centre for Calamity Management.
(i) The EFC was not able to provide the required amount of resources to the States from the Centre.
(ii) The EFC also failed to offer any realistic suggestion to check evasion of taxes.
However, in the context of the present unsatisfactory fiscal and financial scenario of the country, the EFC was able to provide a road map for the journey to be undertaken by the Centre and States towards the goal or the minimum fiscal deficit and maximum rate of economic growth.
12. Twelfth Finance Commission (2005-10) Report:
In pursuance of the provision of Article 280 of the constitution of India and of the Finance Commission (Miscellaneous Provisions) Act, 1951, The Twelfth Finance Commission was constituted or November 1, 2002, with Dr. C. Rangarajan, as chairman. Three other members of the commission were Planning Commission Memher Som Pal, former Cabinet Secretary T.R. Prasad and D.K. Srivastava of National Institute of Public Finance and Policy.
The commission made recommendations on the distribution of the divisible pool of net proceeds of taxes between Union and States and the allocation between the states of such proceeds, principles governing grants-in-aid of the revenues of the states out of the consolidated fund of India, grants under Article 275 of the constitution, and the measures needed to augment the Consolidated Fund of India and grants under Articles 275 of the Constitution, and the measures needed to augment the consolidated Fund of a State to supplement the resources of the panchayats and municipalities.
The terms of reference mandated the Commission to review the state of the finances of the Union and the states and suggested a plan by which the Government, collectively and severally, restore budgetary balance, achieve macro-economic stability and debt reduction along with equitable growth.
Furthermore, the commission was also asked to suggest corrective measures for debt sustainability and to review the Fiscal Reform Facility introduced by the Central Government. Thus the Twelfth Finance Commission ensured equity, efficiency and fiscal prudence while working out the formula for resource allocation to Centre and States during 2005-10.
A. Restructuring Public Finances:
(i) Centre and States to improve the combined tax-GDP ratio to 17.6 per cent by 2009-10.
(ii) Combined debt-GDP ratio, with external debt measured at historical exchange rates, to be brought down to 75 per cent by 2009-10.
(iii) Fiscal deficit to GDP targets for the Centre and States to be fixed at 3 per cent.
(iv) Revenue deficit of the Centre and States to be brought down to zero by 2008-09.
(v) Interest payments relative to revenue receipts to be brought down to 28 per cent and 15 per cent in the case of the Centre and States, respectively.
(vi) States to follow a recruitment policy in a manner so that the total salary bill, relative to revenue expenditure, net of interest payments, does not exceed 35 per cent.
(vii) Each State to enact a fiscal responsibility legislation providing for elimination of revenue deficit by 2008-09 and reducing fiscal deficit to 3 per cent of State Domestic Product.
(vii) The system of on-lending to be brought to an end over time. The long term goal should be to bring down debt-GDP ratio to 28 per cent each for the Centre and the States.
B. Sharing of Union Tax Revenues:
(i) The share of States in the net proceeds of shareable Central taxes fixed at 30.5 per cent, treating additional excise duties in lieu of sales tax as part of the general pool of Central taxes. Share of States to come down to 29.5 per cent, when States are allowed to levy sales tax on sugar, textiles and tobacco.
(ii) In case of any legislation enacted in respect of service tax, after the notification of the eighty eighth amendment to the Constitution, revenue accruing to a State should not be less than the share that would accrue to it, had the entire service tax proceeds been part of the shareable pool.
(iii) The indicative amount of overall transfers to States to be fixed at 38 per cent of the Centre’s gross revenue receipts.
(iv) A grant of Rs 20,000 crore for the Panchayati Raj institutions and Rs 4,000 crore for urban local bodies to be given to States for the period 2005-10.
(v) Priority to be given to expenditure on operation and maintenance (O&M) costs of water supply and sanitation, while utilizing the grants for the Panchayats. At least 50 per cent of the grants recommended for urban local bodies to be earmarked for the scheme of solid waste management through public- private partnership.
(vi) The scheme of Calamity Relief Fund (CRF) to continue in its present form with contributions from the Centre and States in the ratio of 75: 25. The size of the Fund worked out at Rs 21,333 crore for the period 2005-10.
(vii) The outgo from the Fund to be replenished by way of collection of National Calamity Contingent Duty and levy of special surcharges.
(viii)The definition of natural calamity to include landslides, avalanches, cloud burst and pest attacks.
(ix) Provision for disaster preparedness and mitigation to be part of State Plans and not calamity relief.
C. Grants-in-aid to States:
(i) The present system of Central assistance for State Plans, comprising grant and loan components, to be done away with, and the Centre should confine itself to extending plan grants and leaving it to States to decide their borrowings.
(ii) Non-plan revenue deficit grant of Rs 56,856 crore recommended to 15 States for the period 2005- 10. Grants amounting to Rs 10,172 crore recommended for the education sector to eight States. Grants amounting to Rs 5,887 crore recommended for the health sector for seven States. Grants to education and health sectors are additional ties over and above the normal expenditure to be incurred by States,
(iii) A grant of Rs 15,000 crore recommended for roads and bridges, which is in addition to the normal expenditure of States.
(iv) Grants recommended for maintenance of public buildings, forests, heritage conservation and specific needs of States are Rs 500 crore, Rs 1,000 crore, Rs 625 crore, and Rs 7,100 crore respectively.
D. Fiscal reform Facility:
(i) With the recommended scheme of debt relief in place, fiscal reform facility not to continue over the period 2005-10.
E. Debt Relief and Corrective Measures:
(i) Central loans to States contracted till March, 2004 and outstanding on March 31, 2005 amounting to Rs 1,28,795 crore to be consolidated and rescheduled for a fresh term of 20 years, and an interest rate of 7.5 per cent to be charged on them. This is subject to enactment of fiscal responsibility legislation by a State.
(ii) A debt write-off scheme linked to reduction of revenue deficit of States to be introduced. Under this scheme, repayments due from 2005-06 to 2009-10 on Central loans contracted up to March 31, 2004 will be eligible for write-off.
(iii) Central Government not to act as an intermediary for future lending to States, except in the case of weak States, which are unable to raise funds from the market.
(iv) External assistance to be transferred to States on the same terms and conditions as attached to such assistance by external funding agencies.
(v) All the States to set up sinking funds for amortization of all loans.
(vi) States to set up guarantee redemption funds through earmarked guarantee fees.
(i) The Centre should share profit petroleum from New Exploration and Licensing Policy (NELP) areas in the ratio of 50: 50 with States where mineral oil and natural gas are produced. No sharing of profits in respect of nomination fields and non-NELP blocks.
(ii) Every State to set up a high level committee to monitor the utilization of grants recommended by the TFC.
(iii) Centre to gradually move towards accrual basis of accounting.
Although TFC submitted its report on November 30, 2004 but the Union Cabinet approved the report in toto on 2nd February, 2005 as an award. Union Finance Minister Mr. P. Chidambaram observed in this connection that “We believe the 12th Finance Commission has taken into account the requirements of the states and has made a generous and certainly deserving award.”
The recommendations of the TFC provide for an increase in share of central taxes and excise duties to states from 29.5 per cent to 30.5 per cent. The share of central taxes and duties amounts to Rs 6,13,112 crore over the next five years.
Moreover, a total of Rs 1,42,639 crore would be given as grants-in-aid for calamity relief from non-plan revenue account.
Thus the amount of award under share of central taxes added with the sum total of grants-in-aid, touches a whooping Rs 7,55,751 crore. Under grants-in-aid for non-plan revenue deficit, a total of Rs 56,885 crore would be given. For the health sector, a grant of Rs 5,887 crore would be given to seven statesâ€”Assam, Bihar, Jharkhand, Madhya Pradesh, Orissa, Uttar Pradesh and Uttaranchal.
For education, a grant of Rs 10,171 crore would be given to eight statesâ€”Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh and West Bengal. That apart, grants have been awarded to all states for maintenance of roads and bridgesâ€” Rs 15,000 crore, for forestsâ€” Rs 1000 crore, for buildingsâ€” Rs 5,000 crore, for heritage sitesâ€” Rs 7,100 crore for local bodiesâ€” Rs 25,000 crore and for calamity reliefâ€” Rs 16,000 crore.
Thus the TFC recommendations have been broadly categorized under four heads, i.e., tax devaluation grants to states, debt relief to states and other issues. While finalising the share of central taxes and duties, the commission outlined six criteriaâ€”population, income distribution, geographical area, index of infrastructure, tax effort and fiscal discipline. The proceeds of central taxes to states are inclusive of additional excise duty in lieu of sales tax.
The commission has also recommended debt relief in the form of debt write off within five years provided fiscal parameters, set by Fiscal Responsibility and Budget Management Act (FRBM Act) are adhered to. Accordingly, the commission recommended that the scheme of Fiscal Reforms Facility be replaced by a scheme of Debt Relief over the period 2005-10 to bring about an improvement in the stateâ€™s fiscal position.
The debt relief scheme enjoins upon each state to enact a Fiscal Responsibility Law prescribing specific annual targets with a view to eliminating the revenue deficit by 2008-09. Enacting the fiscal responsibility law will be a necessary pre-condition for availing of debt relief, which may be linked to performance in human development or investment climate.
Under this scheme, the central loans to states extended till 31st March, 2004, and outstanding on 31st March 2005 (amounting to Rs 1,28,795) crore were to be consolidated and rescheduled for a fresh term of 20 years at an interest rate of 7.5 per cent.
Thus the recommendations of the Twelfth Finance Commission brought the much needed relief to the fund-starved states along with maintaining some balance in federal fiscal.