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15th finance commission report

 




About the report:

  • The main report is titled “Finance Commission in Covid Times” which depicts a set of scales on its cover to denote balance between the Union and the States.
  • Along with it, two more volumes as part of its submissions have been presented.
  • The first one focuses on the State of the Union government’s finances, with an in-depth scrutiny of key departments, the medium-term challenges facing the Centre and a roadmap for the future.
  • The second volume is entirely dedicated to States, with the finances of each analysed in great depth.
  • The panel has come up with State-specific considerations to address the key challenges that individual States face.
  • All terms of reference (ToR) such as considering a new non-lapsable fund for financing national security and defence spending and offering performance incentives for States that deliver on reforms are considered.
  • Apart from the vertical and horizontal tax devolution, local government grants, disaster management grant, the Commission also examined whether a separate mechanism for funding of defence and internal security ought to be set up.
  • The Commission had submitted an interim report for 2020-21 in 2019.
  • The interim report had reduced States’ share in the divisible pool of taxes from 42% to 41% for that current year, after the dissolution of Jammu and Kashmir as a State.
  • The devolution of funds between the Centre and the States for the period 2021-22 to 2025-26 has been recommended.

Defence fund:

  • In 2019, the central government had added a new ToR for the FC, asking it to examine the scope of setting up a non-lapsable defence and internal security fund.
  • Several states had raised concerns over the proposal to create a non-lapsable defence fund out of the divisible pool of central taxes.
  • The states had sent in additional memoranda to the commission over pointing out that allocation of funds for defence was entirely the responsibility of the union government, should come from the Consolidated Fund of India and not result in any reduction in the divisible pool of central taxes.
  • The status of the fund is yet to be known as the report has not been made public.
 How revenue has been divided?
  • FC has considered the 2011 population along with forest cover, tax effort, area of the state, and “demographic performance” to arrive at the states’ share in the divisible pool of taxes.
  • In order to reward population control efforts by states, the Commission developed a criterion for demographic effort — which is essentially the ratio of the state’s population in 1971 to its fertility rate in 2011 — with a weight of 12.5%.
  • The total area of states, area under forest cover, and “income distance” were also used by the FC to arrive at the tax-sharing formula.

Key recommendations:

  • The Commission has reduced the vertical devolution — the share of tax revenues that the Centre shares with the states — from 42% to 41%.
  • The Commission has said that it intends to set up an expert group to initiate a non-lapsable fund for defence expenditure.
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