FinCom bats for higher cut for states in tax receipts; 3% fiscal deficit post FY16
Reuters | Photo Credit: Arun Jaitley

In a bonanza, the 14th Finance Commission has recommended a record 10 per cent increase in the states' share in the 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.

On revenue expenditure, the Commission estimates that between 2015-16 to 2019-20 it would decline from 10.8 per cent to 9.6 per cent of GDP primarily due to the reduction in the subsidy expenditure from 1.70 per cent in 2015-16 to 1 per cent in 2019-20.

With regard to the centrally sponsored schemes (CSS), the Finance Commission has identified 30 schemes for transfer to the states after taking into account higher devolution.

However, in view of the importance of the schemes and legal obligations, only 8 CSS would be delinked from support from the centre, Jaitley said.

FinCom for 3.6% fiscal deficit in FY16; 3% in following years

The 14th Finance Commission today suggested a fiscal deficit target of 3.6 per cent of GDP in 2015-16 and 3 per cent in the subsequent years on the back of likely pick-up in economic growth.

Finance Minister Arun Jaitley, who is scheduled to present Budget on Saturday, in the Action Taken Report said "the Commission has made recommendations that deal with issues including GST, fiscal environment and fiscal consolidation road map... these recommendations will be examined in due course in consultation with various stakeholders".

The fiscal deficit for the current financial year was pegged at 4.1 per cent of the GDP and government has repeatedly said that it would stick to the target.

The revised estimates of fiscal deficit will be unveiled by the Finance Minister in the Budget.

The Commission in its report tabled in Parliament has suggested the Centre to restrict the fiscal deficit in 2015-16 at 3.6 per cent of GDP.

"For the Union Government, the ceiling on fiscal deficit will be 3 per cent of GDP from the year 2016-17 onwards up to the end of our award period," the Commission's report tabled in Parliament said.

The Commission, headed by former RBI Governor Y V Reddy, further said: "We expect that an improvement in the macroeconomic conditions and revival of growth as well as tax reforms should enhance the total tax revenues of the Union Government, enabling it to eliminate the revenue deficit completely much earlier than 2019-20."

Referring to states, it said fiscal deficit of all them will be anchored to an annual limit of 3 per cent of Gross State Domestic Product (GSDP).

The States will be eligible for flexibility of 0.25 per cent over and above this for any given year for which the borrowing limits are to be fixed if their debt-GSDP ratio is less than or equal to 25 per cent in the preceding year.

The recommendations of the Finance Commission helps Centre to devolve central taxes amongs states.

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