The 15th Finance Commission (FC) of India, headed by N.K. Singh, submitted its report to the President on November 30, 2020. The report, spanning over 500 pages, provides recommendations for the distribution of tax revenues between the Union and state governments for the five-year period from 2021-22 to 2025-26. Here's a comprehensive summary of the key highlights from the 15th Finance Commission report PDF.
The 15th FC's report is a significant document that outlines the fiscal federalism of the country, aiming to balance the needs of the Union and state governments while ensuring equitable growth. It introduces several new parameters and departs from the earlier commissions in its approach to tax devolution.
Key Recommendations and Departures
The 15th FC has recommended a significant shift in the tax devolution formula, moving away from the earlier population-based approach. It has introduced new parameters like income distance, state's share in the national income, and forest cover to determine the share of taxes for each state.
Another notable departure is the recommendation to cap the share of the Union government in the divisible pool of taxes at 42%. This is a significant reduction from the current 41.5% and will result in a higher share for the states.
New Tax Devolution Formula
The 15th FC has proposed a new tax devolution formula that gives equal weight to four parameters: (1) Population, (2) Income Distance (the difference between the state's income and the national average), (3) Area, and (4) Forest Cover. This formula aims to address regional imbalances and promote equitable growth.
For instance, smaller states with lower income levels like Sikkim and Mizoram stand to gain significantly under this new formula. On the other hand, large states with high income levels like Maharashtra and Gujarat may see a slight reduction in their share.
Grants-in-Aid
The 15th FC has recommended a significant increase in the grants-in-aid to the states. It has suggested that the total grants should be around 4.5% of the GDP, up from the current 3.5%. This increase will provide additional resources to the states for implementing various schemes and programs.
The FC has also recommended a shift in the grant system, moving away from the current sector-specific grants to a more flexible performance-based grant system. This will give states more flexibility in using the funds based on their specific needs and priorities.
Recommendations for Union Government
The 15th FC has made several recommendations for the Union government to improve its fiscal management and enhance the overall fiscal situation of the country.
One of the key recommendations is to cap the fiscal deficit of the Union government at 3% of the GDP. The FC has also suggested that the Union government should aim to achieve a fiscal deficit of 2.5% of the GDP by the end of the fifth year of the commission's term.
GST Compensation
The 15th FC has recommended that the Union government should continue to compensate the states for the shortfall in GST revenues until the end of the 15th Finance Commission's term in 2026. The FC has also suggested that the compensation should be linked to the states' GST collections in the base year (2015-16) and the growth in the national GST collections.
Moreover, the FC has recommended that the compensation should be paid in two installments each year, with the first installment being paid in April and the second in October.
Public Sector Enterprises
The 15th FC has recommended that the Union government should take steps to improve the financial health of public sector enterprises (PSEs). It has suggested that the government should consider strategic disinvestment of non-strategic PSEs and use the proceeds to fund capital expenditure.
The FC has also recommended that the government should establish a National Asset Monetization Pipeline to identify and monetize public assets that can generate revenue for the government.
The 15th Finance Commission's report provides a comprehensive roadmap for fiscal federalism in India for the next five years. Its recommendations, if implemented, will have a significant impact on the fiscal situation of both the Union and state governments. The report is a testament to the commission's efforts to balance the needs of different regions and promote equitable growth in the country.
As we look ahead, it is crucial for all stakeholders to engage in a constructive dialogue to understand the implications of the 15th FC's recommendations and work towards their effective implementation. The success of these recommendations will play a significant role in shaping the fiscal landscape of India in the years to come.