fifteenth-finance-commission

Context: Three years after it was constituted, the Fifteenth Finance Commission has finalised its report for fund devolution from the Centre to States for the five years from 2021-22 to 2025-26.

More on the news:

  • The panel will submit its report to the President with recommendations. 
  • The report will be subsequently tabled by the Finance Minister in the Parliament along with an action taken report.

Key recommendations that would feature in its final report: 

  • A separate defence and national security: The viability of creating a separate defence and national security fund as suggested by the Centre. 
    • States would keenly await these recommendations as it may translate into a lower share of funds for them.
  • GST compensation dues to States: The panel is also expected to factor in unpaid GST compensation dues to States for this year, while working out State’s revenue flow calculations for the years beyond 2022. 

About Finance Commission:

  • The Finance Commission is a Constitutionally mandated body that is at the centre of fiscal federalism. 
  • Article 280 of the Constitution of India provides for a Finance Commission as a quasi- judicial body.
  • It is to be constituted by the president of India every 5 years (or at such earlier time as he considers necessary).
  • It recommends the distribution of net proceeds of taxes between Centre and states, and among states.
  • The core responsibility of FC is 
    • To evaluate the state of finances of the Union and State Governments, 
    • To recommend the sharing of taxes between them, 
    • To lay down the principles determining the distribution of these taxes among States. 

15th Finance Commission:

  • The first Finance Commission was set up in 1951 and there have been fifteen so far. Each of them has faced its own unique set of challenges.
  • The Fifteenth Finance Commission was constituted on 27 November 2017, under the chairman NK Singh, against the backdrop of 
    • The abolition of Planning Commission (as also of the distinction between Plan and non-Plan expenditure) and 
    • The introduction of the goods and services tax (GST), which has fundamentally redefined federal fiscal relations.
  • New dynamic: In 2019, the government had requested the Commission to submit an initial report just for the year 2020-21. 
    • That report had trimmed the State’s share of the divisible tax pool from 42%, as recommended by the Fourteenth Finance Commission, to 41%, citing the creation of the Union Territories of Jammu and Kashmir and Ladakh.
  • Term extension: Although its original mandate was to recommend the fund-sharing formula between the Centre and States from 2020-21 to 2024-25, the commission’s term was extended by 11 months. 

Formula that decides a State’s share:

Weight in 15th FC

Parameters

Weight in 14th FC

15 (2011 Census)

Population

27.5 (17.5 - 1972, 10 - 2011 Census)

15

Area

15

10

Forest and Ecology

7.5

45

Income Distance

50

12.5

Demographic Performance

-

2.5

Tax Effort

-

 

Income distance: Income distance is the distance of the state’s income from the state with the highest income.  

Demographic performance:  

  • The Demographic Performance criterion has been introduced to reward efforts made by states in controlling their population.     
  • States with a lower fertility ratio will be scored higher on this criterion.  

Forest and ecology: This criterion has been arrived at by calculating the share of dense forest of each state in the aggregate dense forest of all the states.

Tax effort: This criterion has been used to reward states with higher tax collection efficiency.