Chapter 12: FOURTEENTH FINANCE COMMISSION

Introduction

Chairman is YV Reddy and four members. Report delivered on Dec 2014 and implementation of it shall be done from 2015-2020.

Functions:

1.      Tax devolution to states and between center and states

2.      Grants in aid

3.      Augment resources of Panchayati raj institutions.

4.      Other functions as decided by the president

Report:

1.      Vertical tax devolution between center and states should be 42%. Taxes of art. 268 and art. 269, cess and surcharge on goods shouldn’t be shared with states. Also service tax shouldn’t be shared with J&K. Income tax, corporation tax, excise, customs, security transaction tax, service tax should be shared.

2.      Horizontal tax devolution between states should be based on following factors:

a.       Area [weight-age – 15%]

b.      Forest cover [8%]

c.       Population of 1971 and 2011 census [17%]

d.      Demographic change [10%]

e.       Income distance [50%]

Difference with respect to 13^th FC: fiscal discipline removed as criteria, population -2011 and forest cover added as criteria. No additional benefits for special category states. Also sector specific grants stopped.

Art. 268: levied by union and collected and kept by states. E.g. Stamp duty on cheque, promissory notes, insurance policy, and share transfer. Excise on medicinal, toiletry preparation using alcohol and narcotics.

Art. 269: levied and collected union but fully assigned to states. E.g.: central sales tax [belongs to exporter state]

Report on PRI:

1.      Local bodies are unable to mobilize resources and depend on state government grants. The state finance commissions are created rarely and their reports are implemented but not within timeframe. They are constituted in a manner that their work isn’t in sync with the central finance commissions.

2.      Recommended to disburse 2lac crore to rural bodies and 87000 cr. to urban bodies. Out of which in case of rural bodies 90% must be disbursed and 10% additional based on performance. Similarly for urban bodies 80% must be disbursed and remaining 20% based on performance.

3.      States should share its own taxes with the local bodies like entertainment, professional tax, mining royalty, advertisement tax.

4.       Since union properties can’t be taxed by state or local bodies the union should compensate them.

Q.With Reference to the Fourteenth Finance Commission, which of the following statements is/are correct?
1. It has increased the share of States in the central divisible pool from 32 percent to 42 percent
2. It has made recommendations concerning sector-specific grants
Select the correct answer using the code given below. (UPSC CSAT 2015)

• 1 only




• 2 only




• Both 1 and 2




• Neither 1 nor 2

Ans . A

1. The commission has recommended states’ share in net proceeds of tax revenues be 42 per cent, a huge jump from the 32 per cent recommend by the 13th Finance Commission, the largest change ever in the percentage of devolution. As compared to total devolutions in 2014-15, total devolution of states in 2015-16 will increase by over 45 per cent.

2. No sector specific grant recommendations were made.