The fifth meeting of the Economic Advisory Council of the Fifteenth Finance Commission (XVFC) was held in New Delhi.

About Finance Commission:

  • Article 280 of the Constitution of India provides for a Finance Commission as a quasi judicial body. 
  • It is constituted by the president of India every fifth year or at such earlier time as he considers necessary.
  •  The Finance Commission consists of a chairman and four other members to be appointed by the president
  • The chairman should be a person having experience in public affairs and the four other members should be selected from amongst the following: 
    • A judge of high court or one qualified to be appointed as one. 
    • A person who has specialised knowledge of finance and accounts of the government.
    • A person who has wide experience in financial matters and in administration. 4. 
    • A person who has special knowledge of economics.
  • The Fifteenth Finance Commission (XV-FC or 15-FC) was constituted in November 2017 under the chairmanship of N.K Singh and is required to give recommendations for devolution of taxes and other fiscal matters for five fiscal years, commencing 1 April 2020.
  • The commission constituted an economic advisory council "to advise it on matters related to its terms of reference.

Key Terms of Reference given to commission:

  • The distribution of tax proceeds between the centre and states
  • Principles governing grant in aid to the states
  • Measures to be taken to augment the consolidated fund of states
  • Review the impact of the 14th Finance Commission recommendations on the fiscal position of the centre
  • Review the debt level of the centre and the states, and recommend a roadmap
  • Study the impact of GST on the economy
  • Recommend performance-based incentives for states based on their efforts to control population, promote ease of doing business, and control expenditure on populist measures, among others
  • Should there be a provision of revenue deficit grants?

Major issues focused during the meeting-

  • Possible macro assumptions for the Commission’s award period relating to real growth, inflation etc were discussed in detail. Issues like the structural shift in inflation, the relationship between the GDP deflator and the consumer price inflation and possible trajectories of movement in real activity were discussed.
  • Tax revenues and expenditure patterns emerging both at the Union and the States level. Possible way to improve tax collection for additional resource mobilization.
  • Issues related to stabilization of Goods & Services Tax (GST), relationship between GST Council and Finance Commission and GST compensation being paid to States.

View on GST and associated issues:

  • The GST structure should be made more revenue-friendly so as to enhance predictability and certainty.
  • While the 14% rate of GST compensation to States was mandatory under law for the initial five-year transition period, the commission would not recommend ‘a mechanical replication’ in subsequent years.
  • States had a collective tendency for a ‘race to the bottom’, they are being ‘lulled into a state of complacency’ due to the assured 14% compensation cess , therefore an incentive structure to encourage the State machinery to improve collections and tax compliance is needed.
  • Also there has been a shortfall of GST collections so far this year. While the government had budgeted for ₹6,63,343 crore in GST collections for 2019-20, only about 50% of the target has been collected in the first eight months.
  • Issues related to compliance and adherence to Fiscal responsibility legislation (FRLs) enacted by the respective governments. The need for bringing in fiscal  transparency was underlined in the discussions. 

Way Ahead:

The Commission has submitted its recommendation report for 2020-21 to the Finance Minister and is now working on a ‘comprehensive’ report for the five year period of 2021-26.

Source: [1]  [2] 

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