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BALANCING THE NEEDS: 15th FC

The interim report of 15th FC has left some uncomfortable issues unanswered, which need to be resolved

First

  • Under the current arrangement, states were supposed to be compensated for any shortfall in their GST collections for a five-year period.
  • Lack of clarity about  Centre’s obligation to compensate states if collections from the compensation cess fall short of what is needed to compensate states for their shortfall in revenue, the five-year compensation period ends in 2022.
  • With GST collections falling short of expectations, states have demanded that the compensation period be extended.
  • There is no clear indication either on its continuation after 2022, or whether it will be distributed to states, and if so to what extent.
  • This ambiguity may pose a grave risk to state finances, impacting both stability and predictability of their budgets.
  • It also makes the job of the commission to project states’ revenue for the balance period difficult, affecting its ability to make a fair assessment of their requirements

Second

  • It has proposed performance-based incentives for states in six areas
  • Issue is of Funding- how will this be funded? Will the Commission, while keeping overall transfers to states at the existing level, reduce tax devolution to states, thereby creating fiscal space for providing these incentives?

Third

  • The creation of a separate mechanism for funding defence and internal security, if carved out of gross tax revenues, will further reduce the divisible tax pool that is shared with states.
  • A cash-strapped Centre will undoubtedly welcome any proposal that provides it with greater fiscal space
  • As a constitutional body, the Finance Commission should impartially assess the fiscal position and expenditure requirements of both the Centre and states while finalising its report.
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October 2022
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