State Public Service Commission

15^th Finance Commission

The 15^th Finance Commission (Chair: N. K. Singh) was required to submit two reports. The first report, consisting of recommendations for the financial year 2020-21, was tabled in Parliament on February 1, 2020. The final report with recommendations for the 2021-26 period will be submitted by October 30, 2020.

Key Recommendation in the First Report

• Devolution of Taxes to States: The share of states in the centre’s taxes is recommended to be decreased from 42% during the 2015-20 period to 41% for 2020-21.The 1% decrease is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the central government.

Criteria for Devolution

Terminology in Criteria

• Income Distance: Income distance is the distance of the state’s income from the state with the highest income.The income of a state has been computed as average per capita GSDP during the three-year period between 2015-16 and 2017-18.States with lower per capita income would be given a higher share to maintain equity among states.
• Demographic Performance: The Terms of Reference (ToR) of the Commission required it to use the population data of 2011 while making recommendations.Accordingly, the Commission used only 2011 population data for its recommendations.
• The Demographic Performance criterion has been introduced to reward efforts made by states in controlling their population. It will be computed by using the reciprocal of the total fertility ratio of each state, scaled by 1971 population data.States with a lower fertility ratio will be scored higher on this criterion.The total fertility ratio in a specific year is defined as the total number of children that would be born to each woman if she were to live to the end of her child-bearing years and give birth to children in alignment with the prevailing age-specific fertility rates.
• 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.It has been computed as the ratio of the average per capita own tax revenue and the average per capita state GDP during the three-year period between 2014-15 and 2016-17.

Other Important Recommendation

• Grant-in Aids: In 2020-21, the following grants will be provided to states: (i) revenue deficit grants, (ii) grants to local bodies, and (iii) disaster management grants. The Commission has also proposed a framework for sector-specific grants, state-specific grants and performance-based grants.
• Fiscal Deficit and Debt Levels: The Commission noted that recommending a credible fiscal and debt trajectory roadmap remains problematic due to uncertainty around the economy.It recommended that both central and state governments should focus on debt consolidation and comply with the fiscal deficit and debt levels as per their respective Fiscal Responsibility and Budget Management (FRBM) Acts.
• Off-budget Borrowings: The Commission observed that financing capital expenditure through off-budget borrowings detracts from compliance with the FRBM Act.It recommended that both the central and state governments should make full disclosure of extra-budgetary borrowings.The outstanding extra-budgetary liabilities should be clearly identified and eliminated in a time-bound manner.
• Statutory Framework for Public Financial Management: The Commission recommended forming an expert group to draft legislation to provide for a statutory framework for sound public financial management system.It observed that an overarching legal fiscal framework is required which will provide for budgeting, accounting, and audit standards to be followed at all levels of government.
• Tax Capacity: In 2018-19, the tax revenue of state governments and central government together stood at around 17.5% of GDP.The Commission noted that tax revenue is far below the estimated tax capacity of the country.Further, India’s tax capacity has largely remained unchanged since the early 1990s.In contrast, tax revenue has been rising in other emerging markets.The Commission recommended: (i) broadening the tax base, (ii) streamlining tax rates, (iii) and increasing capacity and expertise of tax administration in all tiers of the government.
• GST Implementation: The Commission highlighted some challenges with the implementation of the Goods and Services Tax (GST).These include: (i) large shortfall in collections as compared to original forecast, (ii) high volatility in collections, (iii) accumulation of large integrated GST credit, (iv)Glitches in invoice and input tax matching, and (v) delay in refunds.The Commission observed that the continuing dependence of states on compensation from the central government (21 states out of 29 states in 2018-19) for making up for the shortfall in revenue is a concern.It suggested that the structural implications of GST for low consumption states need to be considered.
• Financing of Security-related Expenditure: The Terms of Reference of the Commission required it to examine whether a separate funding mechanism for defence and internal security should be set up and if so, how it can be operationalized.In this regard, the Commission intends to constitute an expert group comprising representatives of the Ministries of Defence, Home Affairs, and Finance.The Commission noted that the Ministry of Defence proposed following measures for this purpose: (i) setting up of a non-lapsable fund, (ii) levy of a cess, (iii) monetization of surplus land and other assets, (iv)Tax-free defence bonds, and (v) utilizing proceeds of disinvestment of defence public sector undertakings.The expert group is expected to examine these proposals or alternative funding mechanisms.