15th Finance Commission report recommends 42% share for states in divisible tax poll till 2025-26

File image of Nirmala Sitharaman. News18

New Delhi: The 15th Finance Commission has recommended that states, along with Ladakh and Jammu and Kashmir, be given 42 percent share in the divisible tax pool of the centre during the period 2021-22 to 2025-26.

The panel’s report also provides a range for fiscal deficit and debt path of both the union and states. It further recommended additional borrowing room to states based on performance in power sector reforms.

Excluding the union territories of Ladakh and Jammu and Kashmir, the tax devolution share suggested by the Finance Commission is 41 percent of the total divisible pool, which is arrived at after deducting cesses and surcharges and cost of collection from total tax collection.

Finance Commission is a constitutional body that gives suggestions on centre-state financial relations. The report of the 15th Finance Commission was tabled in Lok Sabha by Finance Minister Nirmala Sitharaman.

In order to maintain predictability and stability of resources, especially during the pandemic, the 15th Finance Commission has recommended “maintaining the vertical devolution at 41 percent – the same as in our report for 2020-21,” an official statement said.

It is at the same level of 42 percent of the divisible pool as recommended by the 14th Finance Commission, the statement said, adding that, however, a required adjustment has been made of “about 1 percent due to the changed status of the erstwhile state of Jammu and Kashmir into the new union territories of Ladakh and Jammu and Kashmir”.

As per the glide path, fiscal deficit should be 6 percent in 2021-22, 5.5 percent in 2022-23, 5 percent in 2023-24, 4.5 percent in 2024-25, and 4 percent in 2025-26.

Addressing a post-budget press conference, Finance Minister Sitharaman said the tax devolution share was brought to 41 percent even this year after Jammu and Kashmir and Ladakh was formed.

“When the state becomes a UT, the funding of the UT is with the centre. So, 42 percent was brought down to 41 percent; and to that extent because it was recognised as a union territory. The centre has been given the responsibility to fund it,” she said.

The panel, headed by former bureaucrat NK Singh, had in November last year submitted its report titled “Finance Commission in COVID Times” to President Ram Nath Kovind.

The gross tax revenue for a five-year period is expected to be Rs 135.2 lakh crore. Out of that, divisible pool is estimated to be Rs 103 lakh crore, as per the commission.

States’ share at 41 percent of divisible pool comes to 42.2 lakh crore for 2021-26 period.

“Including total grants of Rs 10.33 lakh crore and tax devolution of Rs 42.2 lakh crore, aggregate transfers to states is estimated to remain at around 50.9 percent of the divisible pool during 2021-26 period,” it said.

Total transfers (devolution + grants) constitutes about 34 percent of estimated gross revenue receipts of the union leaving adequate fiscal space for the union to meet its resource requirements and spending obligations on national development priorities, the commission added.

The commission was asked to give its recommendations on wide-ranging issues. Apart from tax devolution, the commission was asked to recommend performance incentives for states in many areas like power sector, adoption of DBT and solid waste management as well as funding mechanism for defence and internal security.

This report has been organised in four volumes. Volume I and II, as in the past, contain the main report and the accompanying annexes. Volume III is devoted to the union government and examines key departments in greater depth, with the medium-term challenges and the road map ahead. Volume IV is entirely devoted to states.

The report provided range for fiscal deficit and debt path of both the Union and states. It also recommended additional borrowing room to states based on performance in power sector reforms.

In view of the uncertainty that prevails at the stage that the 15th Finance Commission has done its analysis, as well as the contemporary realities and challenges, “we recognise that the FRBM Act needs a major restructuring and recommend that the time-table for defining and achieving debt sustainability may be examined by a High-powered inter-governmental group,” the statement said.

This high-powered group can craft the new FRBM (Fiscal Responsibility and Budget Management Act) framework and oversee its implementation, it added.

It suggested that the union and state governments amend their FRBM Acts, based on the recommendations of the group, so as to ensure that their legislations are consistent with the fiscal sustainability framework put in place.

This group could also be tasked to oversee the implementation of the 15th Finance Commission’s diverse recommendations.

State governments may explore formation of independent public debt management cells which will chart their borrowing programme efficiently, it added.