What did the 15th Finance Commission recommend for 2020-21?
Sai Krishna Muthyanolla
February 10, 2020
The 15th Finance Commission submitted an interim report with its recommendations for devolution of the tax revenue for 2020-21. Since the criteria adopted by the 15th FC are significantly different from the earlier commissions, which of the states gain and which ones lose out? Here is an explainer.
The first report of the Fifteenth Finance Commission (15 FC) was tabled in the parliament on 01 February 2020. This report for the financial year 2020-21 was submitted to the President of India on 05 December 2019.
Thisis an interim report and contains the recommendations only for 2020-21. The finalreport of the 15 Finance Commission, that will makerecommendations for devolution of tax revenue for the next five years, isexpected to be submitted in October 2020. In her 2020-21 Budget speech, UnionFinance Minister, Nirmala Seetharaman stated
that the central government has accepted therecommendations of the first report in “substantial measure”.
Thisstory explores the recommendations of the finance commission, especially thedevolution of funds to the states for 2020-21.
What
is the role of the Finance Commission?
Article 280 of the Constitution requires the President to constitute a Finance Commission, whose main purpose is to make recommendations on the distribution of tax revenue between the Union and the States, and among the states as well.  The functions of the Finance commission include:
The Fifteenth Finance Commission was constituted on 27 November 2017, by an order of the President, with N.K. Singh as the chairman of the commission.
15th FC – Significant changes to the made to the Criteria
The 14th Finance Commission (14 FC),  whose recommendations were thebasis for devolution for the period 2015-20, recommended that 42% share of thedivisible pool of central taxes for the states. This was a 10% increasecompared to the earlier share of 32%.
Basedon the terms
of reference, substantial changes were made to the criteria adoptedand their respective weightage by the 15 FC.
The 15 FC recommended devolution of 41% from the divisible pool to the states. The difference of 1% is due to bifurcation of the state of Jammu and Kashmir into the Union Territories of J&K and Ladakh.
Karnataka,
Kerala and Telangana see a reduction in their share
Outof the total divisible pool of Central taxes, Uttar Pradesh continues to havethe highest share even as per the 15 FC. However, there is a marginalreduction in its overall share of the divisive pool of the taxes.
Budget
allocation is Rs. 70000 crores less than 15th FC estimates
The 15 FC estimated a shortfall in the gross tax revenue compared to the budget estimates in July 2019. The initial assessment of the revenue for 2019-20 and 2020-21 was based on the provisional accounts of 2018-19, that amounted to Rs. 20.8 lakh crores. In view of the slowdown in sectors including automobiles, garments, construction etc. that contribute to GST, reduction in customs duty & excise collections, reduction in corporate tax collections etc. the 15 FC has reduced its estimate of gross tax revenue collection for 2019-20. The budget estimate was 24.64 lakh cores, but the 15 FC pegs it as Rs. 22.55 lakh crores.
Of this Gross Tax Revenue, few items such as – the cost of collection of taxes, cesses & surcharges, tax revenues of UTs, transfers to NDRF (National Disaster Response Fund) & NCCD (National Calamity Contingency Duty etc. are excluded from the divisible pool.
After these exclusions, the Finance Commission has pegged the amount available for the divisible pool at 82.2% of gross tax revenue which comes to Rs. 18.53 lakh crores for 2019-20 and Rs. 20.86 lakh crores for 2020-21.
With41 % of the divisible pool recommended to be devolved to states, the totaldevolution amount to the states for 2020-21 is Rs. 8.55 lakh crores. As per therecommendations of the 15 FC, Uttar Pradesh is estimated to receive Rs. 1.53 lakh crores (17.93%)  followed by Bihar which is slated to receivearound Rs. 86 thousand crores.
Karnataka,Kerala and Telangana which are allocated a lesser share in lieu of the new criteria,would be receiving about Rs. 31 thousand crores, Rs. 16 thousand crores and Rs.18 thousand crores respectively.  Theleast amount of this divisible pool will go to Goa and Sikkim which is around Rs.3.3 thousand crores each. Kerala would lose around Rs. 5000 crore and Telanganaaround Rs. 2500 crore because of the new allocation, compared to the 14 FC.
However, as per
budget estimates for 2020-21, the totalamount provided for devolution to states is only Rs. 7.84 lakh crores i.e. Rs. 70.9thousand crores less than the total amount recommended by 15 FCbased on its own estimates.  This is dueto less than estimated collection in taxes owing to the slowdown in theeconomy. In fact, the revised estimates of tax revenue in 2019-20 is almost 10%less than the budget estimates.
What
about Grants-in Aid to states as per the 15th FC?
The Finance commission is also required to make recommendations regarding the principles which govern the grants-in-aid to states out of the Consolidated fund of India. This is as per Article 275 of the Constitution of India.
Afterconsultations with the central and the state governments, the 15  FC decided to continue with the existing frameworkand legacy of the earlier Finance Commissions as far as Grants-in-Aid likeRevenue deficit grants, local bodies grants and disaster management grants.
Theapproach of the Finance Commission in respect to grants is the following.
RevenueDeficit Grants, Grants to Local Rural and Urban bodies, Special Grants to fewstates (Karnataka, Telangana & Mizoram) , Grant for Nutrition across thestates etc. were the major grants recommended by 15 FC in itsreport. Special grants were recommended for states losing out on account of thenew tax devolution formula.
AroundRs. 74 thousand crores is recommended by Finance Commission to be provided asRevenue Deficit Grants for 14 states.  Afurther Rs. 60 thousand crores as Grants to Rural Local Bodies and Rs. 29 thousandcrores as grants to Urban Local bodies was recommended.
However,as per the estimates provided in the union budget for 2020-21, only  Rs. 30 thousand crores were set aside as ‘RevenueDeficit Grants’. A total of around 99 thousand crores is provided as budgetestimate towards Grants to local bodies, of which 69 thousand crores is forrural local bodies and 30 thousand crores is urban local bodies.
Area
and Population are still the major drivers for the Tax devolution formula
Kerala(1.79), Andhra Pradesh (1.6), Karnataka (1.81), Tamil Nadu(1.58) andTelangana(1.67) are among the states which have a lower fertility rate andhence score better on the Demographic Performance criteria, scoring better thanstates like Bihar which has a high fertility rate of 2.93.
Sincethe 15 FC  considered only thepopulation of states as per 2011 census unlike the previous commissions whichalso considered the 1971 census, states that have controlled population loseout on this criterion. States like Uttar Pradesh, Bihar and West Bengal havelarge population compared to many other states and score high on this criterion.This couples with larger geographical area (U.P, Maharashtra) would mean that thescore they achieve on these criteria would be more than what a state likeKerala which scores high on development- based criteria.
Thelarger Income Distance of under-developed states and the higher weightageimplies that these states continue to get a higher share in the funds availablefor the states from the divisible pool.
Reducingthe weightage given for Income Gap and introducing development-based criterialike demographic performance is a step in the right direction encouraging thegood performance of the states.
The utilization of higher share by less-developed states to achieve various development targets should also be a primary driving force for future allocation. Target-based performance review of the states that receive higher funds to determine the future allocation of funds can be a way forward to balance the twin objectives of providing impetus as well as rewarding performance.
Featured Image: 15th Finance Commission
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