14 Finance Commissionth 1.Indian Polity M.Laxmikanth Ch.41 2.Survey vol1, chapter10 3.14th FC report Vol1 Dr. Y.V. Reddy Chairman, Ex-RBI gov. 1. Prof. Abhijit Sen (Part Time) Ex-Planning Commission member 2. Ms. Sushama Nath Ex-Finance Secretary 3. Dr. M. Govinda Rao Director, National Institute for Public Finance and Policy, New Delhi 4. Dr. Sudipto Mundle Ex-Acting chief of National Statistical Commission Secretary Ajay Narayan Jha, IAS Formed 2013, Jan Report 2014, Dec. Implementation 1st April 2015 to 31st March 2021 FC-280 Membershi p Function 14th FC: report 1.Tax devolution 2.PRI-SFC 3.Grant-inAid 4.Others 14th FC=> other matters referred by President Public utility Pricing 4.Others Fiscal deficit review Disinvestment Disaster Management GST Polavaram Climate /Sus.Development 14 FC Report th 1.Tax devolution 2.PRI-SFC 3.Grant-inAid 4.Others Vertical (42%) Horizontal Total transfer to States FC Tax Devolution #280 Grant-inAid #275 PC/FinMin CSS funds State Plan grants Implementin g Agencies (2014) Total Transfer to States This should be majority FC; 48% PC; 52% Total Transfer to States States hv 2 FC; 48% PC; 52% Formula based, contribute “unconditional” 90:10, 75:25 etc. transfer “One-size fits all” FC FC: Transfer to States Tax Devolution #280 Grant-in-Aid #275 Verticle (42%) Horizontal 268- levied by union but collected & kept by States 1. Stamp duty- cheque, prom-notes, insurance policy, share transfer 2. Excise duty on medical and toiletry prep. With alcohol / narcotics. 3. Don’t go to consolidated fund of India 269: levied, collected by union but assigned to states Inter state commerce Central sales tax (CST) Belongs to “exporter” state. Income Shown as “--” in the Annual financial statement (budget) FC: share yes 1. 2. 3. 4. 5. 6. 7. Corporation Tax Income Tax Excise duty Service Tax Customs duty STT Wealth Tax No FC Share: 1. Art. 268 (Stamp + Deo) 2. Art. 268-A: service tax-yes but not with J&K 3. Art. 269 (CST / Ebay) 4. Art. 270 (Cess) 5. Art. 271 FC FC: Transfer to States Tax Devolution #280 Grant-in-Aid #275 Verticle (42%) Horizontal “divisible Tax devolution (All central taxes*) Pool” Cess, 270 12th Ranga: Surcharge, 30.5% 271 13th Kelkar: 268, 269 32% Service-J&K 14th Reddy: 42% Union State State Since Cess and Surcharge not included “divisible Tax devolution (All central taxes*) Pool” Cess, 270 12th Ranga: Surcharge, 30.5% 271 13th Kelkar: 268, 269 32% Service-J&K 14th Reddy: 42% Union State Horizontal? State Horizontal distribution Population Census 1971 Demo.Change Census 2011 Both must be considered, else: 1. Family planning 1. 2. 3. 4. 5. Horizontal Fiscal Per capita GSDP compared to capacity best states income Such as Goa, Sikkim,Haryana distance Further distance=more money allotted “progressive” horizontal devolution To check against income and regional imbalance Horizontal distribution: 5 variables Population Census 1971 Demo.Chan ge Census 2011 IncomeDistance Area Opportunity cost Forest-Cover Population; 18% Area; 15% Forest-Cover; 8% Demographic-Change; 10% Income-Distance; 50% Horizontal distribution: 13th vs 14th Weights accorded 13th 14th Population (1971) Population (2011) 25 0 17.5 10 Horizontal distribution: 13th vs 14th Weights accorded 13th 14th Population (1971) Population (2011) Fiscal capacity Income distance Area 25 0 17.5 10 47.5 50 10 15 Horizontal distribution: 13th vs 14th Weights accorded 13th 14th Population (1971) Population (2011) Fiscal capacity Income distance Area Forest Cover Fiscal discipline 25 0 17.5 10 47.5 50 10 0 17.5 15 7.5 0 Find correct answer? In horizontal tax devolution formula, the 14th FC, has A. included ___ as new B. variables? C. 1. Census 1971 Only 2 2. Census-2011 and 3D. “new” 3. Forest cover 4. Fiscal discipline Only 1, 2 and 3 Only 2 and 3 Only 1 and 3 All of them Horizontal distribution 1. Another table for service tax. Because J&K outside service tax regime. 2. Vol1, ch10- how much gain/loss to your state? (interview) Started with 5th FC Given additional central grants and tax breaks. 14th FC Special vs general category reasons 1.hilly and difficult terrain 2.Population density low 3.tribal population high 4.strategic border location 5.Eco. and infrastructure Special cat. States 1.Assam* 2.Nagaland* 3.J&K* 4.Arunanchal Pradesh 5.Himachal Pradesh 6.Manipur 7.Meghalaya 8.Mizoram 9.Sikkim 10.Tripura 11.Uttarakhan d States Special category • (*) from 5th FC • 14th FC no addl. Sops • Top gainerslosers 1. Not 42%, give only 38% 2. Else less money left for union’s own plans and schemes. 3. Union will be forced to cut down 4. MNREGA, NFSA, RTE: can’t cut. 5. So, BRGF scraped. Bihar, Odisha etc. to suffer. Criticism Prof. Abhijit Sen 1. RKVY (Krishi Vikas) budget halved. 2. So, In absolute figures, Bihar & Odisha et al will get less before. 3. Will their state Governments increase funds for backward region and agri. From own budget? Criticism Prof. Abhijit Sen Total transfers from union to state FC: 32Plan >42% ▼by 1.34 ▲1.41 lakh lakh crore 1. 2014: 7.4 lakh crores 2. 2015: 7.6 lakh crores 3. =hardly 4% increased. Total transfer: plan + non plan Verticle Tax devolution just 38% and not 42% Continue Plan transfer as per Gadgil-Mukhrjee formula Until Niti Ayog picture is clear. wrote Dissent note, but Government accepted majority view of FC (42%) recommen ds Prof. Abhijit Sen 1. “14th FC has delivered a strong push towards true federalism.” Do you agree? Justify your stand. 2. Pro: untied funds (42%) 3. Anti: Sen- what about backward states? + faults in horizontal formula Question Mains Interview th 14 FC Report Vertical (42%) 1.Tax devolution Horizontal 2.PRI-SFC Abhi Criticism 3.Grant-inAid 4.Others 1. Lack of money 2. Can’t provide basic amnesties- water, waste Management, street lights etc. 3. Can’t hire large specialized staff 4. IT-infrastructure, building repair etc. difficult Local bodies Problem areas 1. 73 Amendment 1992 2. Form State finance commissions in a year, and thereafter @5 years 3. But not done at regular interval. Hard to sync. data for FC. 4. SFC-report not all implemented. 5. Some implemented but not rd Local bodies Problem areas SFC 14 FC Report th 1.Tax devolution 2.PRI-SFC 3.Grant-inAid 4.Others Grant in Aid Other reforms • Vertical • Horizontal • Rural vs urban Other measures Grant-in-Aid 14th FC: helping the local bodies • Tax-reforms • North East • Muni.bonds Grant in Aid To tal 2.8 La 7 kh Union State 10th FC was first to recommend State 2.8 cr. 7 La kh Grant in Aid Unio n Stat e Stat e 90% Population (2011) + 10% Rura Urb Area l 2 lakh Cr. an 87,000 cr 14th FC: Grant in Aid for Local Bodies Union 2.8 cr. 7 La kh State State 90% Population (2011)Urban + 10% Area Rural 90% basic 2 lakh Cr. 10% Performa nce 80% basic 87,000 cr 20% Performa nce • Vertical • Horizontal • Rural vs urban Other measures Grant-in-Aid 14th FC: helping the local bodies • Tax-reforms • North East • Muni.bonds PRI funding States should Share mining royalty Property tax and advertisement State Tax tax Devolution Entertainment tax: cable, net-café, boat rides Professional Tax: 2500 => 12,000 (Art. 276 amendment needed) Kerala, TN local bodies get professional tax. Increase property tax as per inflation & Development Assessment every 4-5 years. Stringent action on evasion PRI Property Tax Art. 285(1): union properties can’t be taxed by state / local body Previous FC recommended they should be taxed 14th FC: at least compensate local bodies PRI funding Union properties Part 9 and 9-A don’t apply to Assam, Meghalaya, Tripura, Manipur (AMTM) So, FC PRI-reforms not valid for them Expand 275(1) to fix this lacuna Local bodies North East • Vertical • Horizontal • Rural vs urban Other measures Grant-in-Aid 14th FC: helping the local bodies • Tax-reforms • North East • Muni.bonds 1. Large Corp. help them directly launch muni. bonds 2. Small municipalities: setup intermediary to help them issue bonds. 3. SEBI norms: L2_P1_Capital Market.pptx PRI Muni Bonds Other measures Property Mining Profession al Northeast Entertainm ent Muni.Bond s SFC reports Mains questions 1. “14th FC has taken extra precautions to ensure local bodies are not left at the mercy of state government.” Elaborate. 2. “Even after a decade of 73rd & 74th Amendment, PRI bodies have not become a strong and vibrant unit of Government, due to lack of financial resources.” Examine reasons and 3. 1. Skip 2. Attempt 14 FC Report th 1.Tax devolution 2.PRI-SFC 3.Grant-in-Aid 4.Others PRI Disaster Management Post devolution revenue deficit 14 FC: Disaster Management th 1.Existing mechanism 2.Problems and solutions Funds: National Disaster Management Act 2005 NCCF merged in this Respon se Mitigati on Natio nal Natio nal State State Distric t Distric t Not all states have formed 1. NCCF (calamity and contingency fund) merged into this (13th FC) 2. Money from cess on customexcise, but what after GST? 3. Design new arrangement to get money in this fund 4. Give tax exemption to private donors 5. Encourage CSR funding into NDRF Problem areas Cyclones landslides droughts avalanches earthquake cloud s bursts fires pest floods attacks tsunamis cold Hailstorms waves* NDRF Present list • Limited • * newly added Expand the list of "official calamities" for state-specific disasters: 1. Heat waves 2. coastal erosion 3. bamboo flowering 4. Snakebites 5. Monkey and elephant attacks NDRF Calamity list Funds: National Disaster Management Act 2005 1.New mechanism for funding 2.Expand the list Respon se Natio nal State Distric t 1. 275(1): Union grants money 2. So far: 75-25 (General) / 9010 (Special) 3. 14th FC: 90-10 all 4. Hazard risk vulnerability index: More vulnerable states get bigger allotment (inflation, labor cost) 5. Total Rs.61,000 SDRFs SDRF 14th FC recommen ds Funds: National Disaster Management Act 2005 1.New mechanism for funding 2.Expand the list 1.90:10 rule 2.Hazard vul. Index Make noncompulsory Respon se Natio nal State Distric t National State / District Questions on disasters MCQ: Who gives money in SDRF? How much MCQ: How many funds provided in NDMA? MCQ: List of official calamities. Mains: Discuss in brief, the constrains in disaster response funding in India, and list the remedies suggested by 1. Skip 2. Attempt 3. 14FC. 2.PRI-SFC th 14 FC Report 1.Tax devolution 3.Grant-in-Aid 4.Others Sector specific stopped, because large $$ PRI Disaster Management Post devolution revenue deficit Sector Specific 14th FC Report 1.Tax devolution 2.PRI-SFC Coop. Fed 3.Grant-inAid Public Utility 4.Others PSE Fiscal Consolidation GST 1. Social sector spending: 1. FC: outside purview 2. PC/Niti: state Government participation? 2. Better use Inter-State councils (Art. 263) 3. Identify sectors, design schemes, distribution-criteria 4. +focus on NE + environment 14th FC Cooperativ e federalism 14th FC Report 1.Tax devolution 2.PRI-SFC Coop. Fed 3.Grant-inAid Public Utility 4.Others PSE Fiscal Consolidation GST 1. Punish states delaying electricity subsidies to companies 2. State electricity regulatory commissions Fund (SERC) 3. Rail tariff authority: give statutory status (amend Rai act ‘89) 4. Independent regulator for road sector 14th FC Public Utility Pricing 1. WRA- water regulatory authorities for drinking, irrigation and industrial 2. Install water meters @customer’s expense 3. Environment helped…yes 14th FC Public Utility Pricing 14th FC Report 1.Tax devolution 2.PRI-SFC Coop. Fed 3.Grant-inAid Public Utility 4.Others PSE Remaining 3 in Separate lectures on relevant topics Fiscal Consolidation GST