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Centre accepts Finance Commission report, ups states’ tax share to 42%

Centre accepts Finance Commission report, ups states’ tax share to 42%
In a bonanza, the 14th Finance Commission has recommended a record 10 percentage point increase in the states’ share of Union taxes to 42 per cent, which has been accepted by the Centre and will give the states an additional Rs 1.78 lakh crore in 2015-16.

The report of the Commission, headed by former RBI Governor Y V Reddy, also recommended a grants-in-aid of Rs 48,906 crore for 11 revenue deficit states, including Andhra Pradesh post division, West Bengal and Jammu and Kashmir, for 2015-16. For the period up to 2020, it will be over Rs 1.94
lakh crore.

The total devolution to the states in 2015-16 will be Rs 5.26 lakh crore, as against Rs 3.48 lakh crore in 2014-15, representing an increase of Rs 1.78 lakh crore. The total devolution to states during the five year period up to 2019-20 will be Rs 39.48 lakh crore. Addressing a press conference, Finance Minister Arun Jaitley said the Centre has accepted the recommendations of the Finance Commission and it shows NDA government’s commitment to cooperative federalism.

In a letter to all Chief Ministers, Prime Minister Narendra Modi said the increased money with states will give them the required freedom to tailor make development schemes to suit their needs. Besides raising the share of states in the divisible pool of central taxes from 32 per cent previously to 42 per cent, the Finance Commission also provided for Rs 2.87 lakh crore for five year period for Panchayats and Municipalities.

“The higher tax devolution will allow states greater autonomy in financing and designing of schemes as per their needs and requirements,” the report said. Jaitley said 42 per cent increase in states’ share is “the largest ever change in percentage of devolution. In the past, when Finance Commissions have recommended an increase, it has been in the range of 1-2 per cent.” He further said that as compared to the devolutions in 2014-15, the total outgo towards the states in 2015-16 will see an increase of over 45 per cent.

The Commission suggested a fiscal deficit target of 3.6 per cent for 2015-16 and 3 per cent in
subsequent years. Abhijit Sen, one of the four members of the Finance Commission, has submitted a dissent note suggesting that devolution to the states should be pegged at 38 per cent in the first year and should be maintained at that level unless there is an agreement to deal with the fiscal problems.

With regards to Goods and Services Tax (GST), the report said: “We expect that the final GST design would have all the characteristics of a good tax system such as broad base, low rate, minimum rate differentiation, low compliance cost and reduced distortions to the economy”.

It suggested that 100 per cent compensation be paid to the states in the first, second and third years, 75 per cent compensation in the fourth year and 50 per cent compensation in the fifth and final year after GST roll out. “We recommend the creation of an autonomous and independent GST Compensation Fund through legislative actions in a manner that it gives reasonable comfort to States, while limiting the period of operation appropriately,” it added.
PTI

PTI

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