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CONTINUITY AND FISCAL FOLLOW THROUGH: 15TH FINANCE COMMISSION’S INTERNIM REPORT

Why in news?

  • The appointment of the Fifteenth Finance Commission by the President of India under Article 280 of the Constitution was notified on November 27, 2017.
  • It was required to submit the report by October 30, 2019 for five years for the period 2020-21 to 2024-25
  • Notifications were issued first, on July 27 extending the tenure of the Commission up to November 30, 2019, and again on November 29 requiring it to submit two reports, one for 2020-21 and the second covering the period of five years beginning April 1, 2021 Further extending the tenure up to October 30, 2021
  • The first report submitted by the Commission was placed in Parliament by the Union Finance Minister before presenting the Union Budget on February 1, 2019

The reasons for extending the tenure of commission was 

  1. The abolition of Statehood to Jammu and Kashmir required the Commission to make an estimation excluding the Union Territory.
  2.  Second, the deceleration in growth and low inflation has substantially slowed down the nominal GDP growth which is the main tax base proxy; making projections of tax revenues and expenditures based on this for the medium term could have posed serious risks.
  3. Poor revenue performance of tax collection and more particularly Goods and Services Tax combined with the fact that the compensation agreement to the loss of revenue to the States was effective only two years of the period covered by the Commission’s recommendations posed uncertainties

Addressing States’ concerns

15th FC, In addition to income distance, population and area and forest cover, has used two additional factors

  1. Demographic performance
  2. Tax effort.

Changes adopted 

  1.  It has assigned 15% weight to the 2011 population
  2.  Reduced the weight of income distance to 45%
  3. Increased the weight to forest cover and ecology to 10% 
  4. 12.5% weight to demographic performance 
  5. 2.5% weight to tax effort

Local body grants

  • The recommended grants for local bodies amount to ₹90,000 crore comprising ₹60,750 crore for panchayats and the remaining ₹29,250 crore for municipal bodies.
  • All the three layers of panchayats will receive the grant and 50% of the grant is tied to improving sanitation and supply of drinking water
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