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In this article we will discuss about thirteenth finance commission:- 1. Subject-Matter of Thirteenth Finance Commission 2. Terms of Reference of FFC 3. Recommendations.
Subject-Matter of Thirteenth Finance Commission:
In pursuance of the provision of Article 280 of the Constitution of India and of the Finance Commission (Miscellaneous Provisions) Act, 1951, the Thirteenth Finance Commission was constituted on November 13, 2007, with Dr. Vijay L. Kelkar as Chairman.
Other members of the Commission included Emeritus Professor, National Institute of Public Finance and Policy Dr. Indira Raja Raman, Chief Economist and NCAER Director, Dr. Abusaleh Shariff and Former Director, ISI, New Delhi, Prof. Atul Sharma as full time members.
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Shri B.K. Chaturvedi, Member Planning Commission was appointed as a part time Member. Shri Sumit Bose was appointed as Secretary to the commission. Subsequently, the President appointed Dr. Sanjiv Misra, Former Secretary (Expenditure) Ministry of Finance as Member of the Commission in place of Dr. Abusaleh Shariff who was unable to join.
The Commission made recommendations on the distribution of the divisible pool of net proceeds of taxes between Union and States and 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 and grants under article 275 of the Constitution, and the measures needed to augment the Consolidated Fund of India and grants under article 275 of the Constitution and the measures needed to augment the consolidated of a state to supplement the resources of local bodies, i.e., panchayats and municipalities.
The recommendations of the Thirteenth Finance Commission will cover the period of five years, i.e., from April 1, 2010 to March 31, 2015.
The Commission reviewed the state of finances of the Union and States keeping in view the operation of the States’ Debt Consolidation and Relief Facility 2005-2010 (DCRF) and also suggested measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth.
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The commission has also been mandated to review the present arrangements concerning financing of disaster management with reference to the National Calamity Contingency Fund and the Calamity Relief Fund and the funds envisaged in the Disaster Management Act, 2005.
While following the routine exercise as followed by earlier commissions, the Thirteenth Finance Commission has also taken into consideration the likely impact of the proposed implementation of Goods and Services Act (GST) with effect from 1st April, 2010, including its impact on foreign trade.
The Thirteen Finance Commission (FCXIII) submitted its report covering all aspects of its original mandate on 30th December, 2009, which was subsequently placed and accepted in the Parliament on 25th February, 2010.
Terms of Reference of FFC:
The terms of reference mandated the Thirteenth Finance Commission to review the state of the finances of both the Union and the states and suggest a strategy by which the Government, collectively and severally may bring about a restore budgetary balance achieve macro-economic stability and debt consolidation and Relief facility along with equitable growth.
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The Commission submitted its report on December 29, 2010 covering the period 2010-15. The Commission has followed the Terms of reference fixed for it and made all recommendations on the basis of such reference.
On 25th February, 2010 the Finance Minister Mr. Pranab Mukherjee placed the Thirteenth Finance Commission Report at the Parliament and subsequently the report was accepted in the Parliament after threadbare discussion.
Accordingly, the centre has accepted most of the recommendations of the Thirteenth Finance Commission (TFC) headed by Vijay Kelkar related to revenue sharing with states. As per these recommendations, 32 per cent of total revenue mobilised by centre will be shared by different states.
Moreover, these states will get Rs 3.19 lakh crore grant. For the first time, municipal bodies and panchayats will be given a share of central taxes amounting to Rs 87,000 crore. The TFC has made recommendations to provide grant for education and environment and also to provide compensation to states for introducing Goods and Services Tax (GST).
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It also suggested to withdraw the stimulus packages introduced to face global recession step by step.
The Commission has also advised the centre to reduce the fiscal deficit to the extent of 3.0 per cent of GDP by the year 2013-14. Revenue deficit should also be reduced to zero level by the same year. The Commission (FC-XIII) in its report has made provision for divestment of equities of PSUs from the present holding of 84.73 per cent to 51 per cent.
Accordingly, the Government could now mop up over Rs 3.81 lakh crore through selling its state in the listed and unlisted state-run firms over next five years.
The Chairman of Thirteenth Finance Commission Vijay Kelkar was much optimistic that the government would be able to meet the targets of fiscal consolidation even if it continues with the existing stimulus packages in the short run.
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The Commission while finalising its resource devolution report assumes special importance in that the direct and indirect tax areas are stated to undergo further reforms under both Direct Tax Code (DTC) and Goods and Service Tax (GST) to be implemented soon.
In accordance with its added terms of reference, the Finance Commission has also looked thoroughly at the implications of environment and climate change, ways to improve outcomes and outputs of public expenditure and also on the impact of GST on trade and commerce.
In a major boost to three special category states of Assam, Sikkim and Uttrakhand, the TFC has recommended performance incentive grant of Rs 1500 crore. These three states have graduated out of non plan revenue deficit.
The recommendations of TFC regarding the principles for disbursement of different grants have a conditionality element which is non-intrusive in nature.
The Commission’s approach to setting conditionalities is informed by following three objectives:
(i) To ensure additionally of resources so as to reduce the deficit in resources to provide public goods.
(ii) To improve transparency and accountability, thus enabling a ‘feed-back’ route in improving policy formulation and implementation so as to empower citizens as well as their elected representatives, including those at municipal and panchayat levels.
(iii) To assist in better prudential monitoring of these expenditures by proposing performance-based incentives/conditionalities for the states.
The overall approach of FC-XIII was to foster “inclusive and green growth promoting fiscal federalism”. Observing that as against the level of 75 per cent targeted by the Twelfth Finance Commission, the combined debt-GDP ratio was 82 per cent in the terminal year (2009-10), the FC-XIII focused on anchoring the fiscal consolidation process in a medium term debt reduction framework.
The FC-XIII has also recommended a calibrated exit strategy from the expansionary fiscal stance of 2008-09 and 2009-10 as the main agenda of the Central Government. Further it has suggested that the revenue deficit of the centre needs to be progressively reduced and eliminated, followed by emergence of revenue surplus by 2014-15.
Perhaps for the first time, a cap on the overall debt of the Government has been recommended. It has suggested a target of 68 per cent of the GDP for the combined debt of the Centre and the States to be achieved by 2014-15. Thus the fiscal consolidation path embodies steady reduction in the augmented debt stock of the Centre to 45 per cent of GDP by 2014-15 and that of states to less than 25 per cent of the GDP by 2014-15.
The FC-XIII has also suggested the need for the FRBM Act to specify the nature of shocks that would require a relaxation of targets under the Act. It has also recommended that the share of states in the net proceeds of sharable Central taxes be 32 per cent in each of the financial years from 2010-11 to 2014-15.
The FC-XIII has recommended fiscal consolidation through the elimination of revenue deficit as the long-term target for both the Centre and States.
Following a design similar to that adopted by the recent Finance Commissions, the FC-XIII indicated a normative discipline for both Centre and States; with equal treatment which entailed no automatic priority for any level of Government and a focus on equalization (and not equity).
The latter signalled the intent of the FC-XIII to ensure that States and local bodies have the fiscal potential to provide comparable levels of public service at reasonably comparable levels of taxation. This principle does not guarantee uniformity in public services across the country; but it addresses the fiscal requirements of each jurisdiction to enable such uniformity.
Terming the goods and services Tax (GST) as a game-changing tax reform measure which will significantly contribute to the buoyancy of tax revenues and acceleration of growth as well as generate positive externalities, the FC-XIII proposed a grand bargain.
The six elements of the grand bargain for the GST included:
1. The design;
2. Operational modalities;
3. Binding agreement between the Centre and States with contingencies for change in rates and procedures;
4. Disincentives for non-compliance;
5. The implementation schedule and;
6. The procedure for States to claim compensation.
For this purpose, the FC-XIII recommended the sanction of Rs 50,000 crore as compensation for revenue losses of States on account of the implementation of the GST. This amount would shrink to Rs 40,000 crore were the implementation to take place on/after April 1, 2013 and further to Rs 30,000 crore were it to take place on/after April 1, 2014.
Following are some of the key recommendations of the FC-XIII:
1. The share of States in net proceeds of shareable Central taxes shall be 32 per cent every year for the period of the award.
2. Revenue accruing to a State is to be protected to the levels that would have accrued to it had service tax been a part of the shareable Central taxes, if the 88th Amendment to Constitution is notified and followed up by a legislations enabling States to levy service tax.
3. Centre is to review the levy of cesses and surcharges with a view to reducing their share in its gross tax revenue.
4. The indicative ceiling on overall transfers to States on revenue account may be set at 39.5 per cent of gross revenue receipts of the Centre.
5. The Medium Term Fiscal Plan (MTFP) should be a statement of commitment rather than intent.
6. New disclosures have been specified for the Budget/MTFP including on tax expenditure, public- private partnership liabilities and the details of variables underlying receipts and expenditure projections.
7. The Fiscal Responsibility and Budget Management (FRBM) Act needs to specify the nature of shocks that would require relaxation of the targets there under.
8. States are expected to be able to get back to their fiscal correction path by 2011-12 and amend their FRBM Acts to the effect.
9. State Governments are to be eligible for the general performance and special area performance grants only if they comply with the prescribed stipulation in terms of grants to local bodies.
10. The National Calamity Contingency Fund (NCCF) should be merged with the National Disaster Response Fund (NDRF) and the Calamity Relief Fund (CRF) with the State Disaster Response Funds (SDRFs) of the respective States.
11. A total non-Plan revenue grant of Rs 51,800 crore is recommended over the award period for eight States. A performance grant of Rs 1500 crore is recommended for three special category States that have graduated from a non-Plan revenue deficit situation.
12. An amount of Rs 19,930 crore has been recommended as grant for maintenance of roads and bridges for four years (2011-12 to 2014-15).
13. An amount of Rs 24,068 crore has been recommended as grant for elementary education.
14. An amount of Rs 27,945 crore has been recommended for State-specific needs.
15. Amounts of Rs 5,000 crore each as forest, renewable energy and water sector-management grants have been recommended.
16. A total sum of Rs 3,18,581 crore has been recommended for the award period as grants-in-aid to States.
It would be now better to look at the summary of recommendations of Thirteenth Finance Commission (FC-XIII).
Recommendations of Thirteenth Finance Commission:
Following are some of the recommendations of the Thirteenth Finance Commission (FC-XIII):
Finances of Union and States:
1. The Ministry of Finance (MoF) should ensure that the finance accounts fully reflect the collections under cesses and surcharges as per the relevant heads, so that there are no inconsistencies between the amounts released to states in any year and the respective percentage shares in net Central taxes recommended by the Finance Commission for that year.
2. The states need to address the problem of losses in the power sector in a time-bound manner.
3. Initiatives should be taken to reduce the number of Centrally Sponsored Schemes (CSS) and to restore the predominance of formula-based plan transfers.
4. A calibrated exit strategy from the expansionary fiscal stance of 2008-09 and 2009-10 should be the main agenda of the Centre.
Goods and Services Tax (GST):
5. Both the Centre and the States should conclude a ‘Grand Bargain’ to implement the Model GST as per the design and operational modalities reflected in the TFC report.
6. Any GST model adopted must be consistent with all the elements of the Grand Bargain. To incentivize implementation of the Grand Bargain, this Commission recommends sanction of a grant of Rs 50,000 crore. The grant would be used to meet the compensation claims of State Governments for revenue losses on account of implementation of GST between 2010-11 and 2014-15, consistent with the Grand Bargain.
7. The Empowered Committee of State Finance Ministers (EC) should be transformed into a statutory council.
8. The states should take steps to reduce the transit time of cargo vehicles crossing their borders by combining check-posts with adjoining states and adopting user-friendly options like electronically issued passes for transit traffic.
Union Finances:
9. The policy regarding use of proceeds from disinvestment needs to be liberalised to also include capital expenditure on critical infrastructure and the environment.
10. Records of landholdings of PSUs need to be properly maintained to ensure that this scarce resource is put to productive use, or made available for other public projects, or else, sold.
State Finances:
11. The practice of diverting plan assistance to meet non-plan needs of special category states should be discontinued.
12. With reference to public sector undertakings:
(i) All states should endeavour to ensure clearance of the accounts of all their Public Sector Undertakings (PSUs).
(ii) The states should use the flexibility provided by the Comptroller and Auditor General (C& AG) to clear the backlog of PSU accounts.
(iii) All states need to draw up a roadmap for closure of non-working PSUs by March 2011. Divestment and privatisation of PSUs should be considered and actively pursued.
(iv) The Ministry of Corporate Affairs should closely monitor the compliance of state and central PSUs with their statutory obligations.
(v) A task force may be constituted to design a suitable strategy for disinvestment/privatisation and oversee the process.
13. With reference to the power sector:
(i) Reduction of Transmission and Distribution (T&D) losses should be attempted through metering, feeder separation, introduction of High Voltage Distribution Systems (HVDS), metering of distribution transformers and strict anti-theft measures.
(ii) Unbundling needs to be carried out on priority basis and open access to transmission strengthened.
(iii) Proper systems should be put in place to avoid delays in completion of hydro projects.
(iv) Instead of putting up thermal power plants in locations remote from sources of coal, states should consider joint ventures (JVs) in or near the coal rich states.
14. Migration to the New Pension Scheme needs to be completed at the earliest.
Sharing of Union Tax Revenues:
15. The share of states in net proceeds of shareable central taxes shall be 32 per cent in each of the financial years from 2010-11 to 2014-15. Under the Additional Duties of Excise (Goods of Special importance) Act, 1957, all goods were exempted from payment of duty from 1 March 2006.
Following this, the Centre had adjusted the basic duties of excise on sugar and tobacco products. In view of these developments, the states share in the net proceeds of shareable central taxes shall remain unchanged at 32 per cent, even in the event of states levying sales tax [or Value Added Tax (VAT)] on these commodities.
16. The indicative ceiling on overall transfers to states on the revenue account may be set at 39.5 per cent of gross revenue receipts of the Centre.
17. The share of each state in the net proceeds of all shareable central taxes in each of the financial years from 2010-11 to 2014-15 shall be as specified in Table 17.8.
Revised Roadmap for Fiscal Consolidation:
18. The revenue deficit of the Centre needs to be progressively reduced and eliminated, followed by emergence of a revenue surplus by 2014-15.
19. A target of 68 per cent of GDP for the combined debt of the Centre and states should be achieved by 2014-15. The fiscal consolidation path embodies steady reduction in the augmented debt stock of the Centre to 45 per cent of GDP by 2014-15, and of the states to less than 25 per cent of GDP, by 2014-15.
20. Transfer of disinvestment receipts to the public account to be discontinued and all disinvestment receipts be maintained in the consolidated fund.
21. GoI should list all public sector enterprises that yield a lower rate of return on assets than a norm to be decided by an expert committee.
22. The Fiscal Responsibility and Budget Management (FRBM) Act needs to specify the nature of shocks that would require a relaxation of FRBM targets.
23. Structural shocks such as arrears arising out of Pay Commission awards should be avoided by, in the case of arrears, making the pay would commence from the date on which it is accepted.
24. States should amend/enact FRBM Acts to build in the fiscal reform path worked out. State-specific grants recommended for a state should be released upon compliance.
25. Independent review/monitoring mechanism under the FRBM Acts should be set up by states.
26. A window for borrowing from the Central Government needs to be available for fiscally weak states that are unable to raise loans from the market.
Grant for Local Bodies:
The FC-XIII has made following recommendations for local body grants:
27. The quantum of local body grants should be provided as per Table 17.9 as given below:
The general basic grant as well as the special areas basic grant should be allocated amongst states as specified.
27. State Governments will be eligible for the general performance grant and the special areas performance grant only if they comply with the prescribed stipulations. These grants will be disbursed in the manner specified.
28. The states should appropriately allocate a portion of their share of the general basic grant and general performance grant, to the special areas in proportion to the population of these areas. This allocation will be in addition to the special area basic grant and special area performance grant recommended by us.
29. State Governments should appropriately strengthen their local fund audit departments through capacity building as well as personnel augmentation.
30. Given the increasing income of State Governments from royalties, they should share a portion of this income with those local bodies in whose jurisdiction such income arises.
31. State Governments should ensure that the recommendations of State Finance Commissions (SFCs) are implemented without delay and that the Action Taken Report (ATR) is promptly placed before the legislature.
32. Local bodies should consider implementing the identified best practices.
33. A portion of the grants provided by us to urban local bodies be used to revamp the fire services within their jurisdiction.
34. Local Bodies should be associated with city planning functions wherever other development authorities are mandated this function. These authorities should also share their revenues with local bodies.
Grants-in-aid to States:
Non Plan Revenue Deficit NPRD and Performance Incentive:
35. Total non-plan revenue grant of Rs 51,800 crore is recommended over the award period for eight states.
36. A performance grant of Rs 1,500 crore is recommended for three special category states which have graduated from a Non-plan Revenue Deficit (NPRD) situation.
Elementary Education:
37. A grant of Rs 24,068 crore is recommended for elementary education over the award period.
Environment:
38. An amount of Rs 5,000 crore is recommended as forest grant for the award period.
39. An incentive grant of Rs 5,000 crore is recommended for grid-connected renewable energy based on the States’ achievement in renewable energy capacity addition from 1 April 2010 to 31 March 2014.
40. An amount of Rs 5,000 crore is recommended as water sector management grant for four years, i.e., 2011-12 to 2014-15 of the award period.
State-specific Needs:
41. A total grant of Rs 27,945 crore is recommended for state-specific needs.
Monitoring:
42. The High Level Monitoring Committee headed by the Chief secretary to review the utilisation of grants and to take corrective measures, set up as per the recommendation of-FC-XII, should continue.
43. The total grants-in-aid recommended for the states over the award period are given in Table 17.10.
Thus the FC-XIII report has made specific recommendations both for centre, states and local bodies along with making specific provision for some critical factors like disaster relief, elementary education, environment, maintenance of roads and bridges and state specific needs.
With the current report the states and Union Territories are supposed to be happier this time as the report has suggested higher share of Central tax as compared to what was recommended by Twelfth Finance Commission.
While the states demanded 50 per cent of share in Central taxes and are aspiring for greater decentralisation, the decision of FC-XIII to enhance the degree of devolution which include also a part of surcharges and cess would certainly be in tune with better Centre-State fiscal relations in the country.
Considering the irregularities made by some states often ignoring utilisation of centrally sponsored development projects by not shouldering their own part of fiscal burden and also by delaying the plan framing, the FC-XIII report has made some provisions of disciplinary control in the administration of Centre-State relations.
Such provisions has been made in legitimate public interest. Thus it is expected that the recommendations of FC-XIII may bring the much needed relief to the fund starved states along with maintaining some balance in federal fiscal transfer.
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