Thursday, July 4, 2013

Thirteenth Finance Commission at a glance

The government on February 25, 2010 presented 13th Finance Commission’s Report (2010-15) in the Parliament. It is worth noting that 13th Finance Commission, under the Chairmanship of Mr. Vijai Kelkar had submitted its report to the President on December 30, 2009.
Finance Commission in its report has told governments at the Centre and States to set their fiscal house in order. Report has raised the share of taxes that the states would be entitled to receive over the next five years by 1.5 percentage points. Commission has suggested a roadmap for the introduction of a single-rate goods and service tax (GST).
Commission’s new roadmap for fiscal responsibility suggests that the overall debt of the centre and states by capped at 68 per cent of GDP from the current 82 per cent level and 75 per cent recommended by the Twelfth Finance Commission has recommended the centre to reduce the level of debt to 45 per cent of GDP by March 2015 from the current level of 54.2 per cent. For states the reduction in debt is recommended at 2 percentage points to 25 per cent.
As per commission’s recommendations, the centre should transfer 32  per cent of the taxes it collects to states against 30.5 percent at present. The overall ceiling – including transfers from the centre’s gross revenue has been raised from 38 to 39.5 per cent.
Among the proposals that provide a thrust to fiscal federalism, the commission has recommended that local bodies get up to 2.5 per cent of the divisible tax pool. Of this, up to 1 per cent can be incentive-linked.
Report recommends that the states contribution is centrally sponsored schemes should be 50 per cent of the cost, against 40 per cent for scheme such as Sarve Shiksha Abhiyan .
The Finance Commission has projected that tax receipts would register that tax receipts would register a compounded annual growth rate between March 2010 and March 2015 of over 17 per cent while the nominal growth in GDP is estimated at 13.2 per cent.
Commission suggests to initiate fiscal consolidation in 2011-12 so that the centre can reduce the level of fiscal deficit to 3 percent of the GDP by 2013-14. The government should also ensure zero revenue deficit so that borrowing are used to meet investment requirements.
Prescribing a zero revenue deficit as the golden rule, the commission has recommended that the Endeavour for all states should be to attain that level by 2014-15.
In  its action-taken reports, the government has accepted most of the recommendations of the 13th Finance Commission. The government has accepted GST and new fiscal responsibility roadmap in-principle and proposals will be worked out to meet the targets set out by the commission.

Highlights: At a Glance

Thirteenth Finance Commission 2010-15
About Devolution
  • States to get 32 per cent of central taxes, compared to 30.5 per cent now.
  • Up to 2.5 per cent of divisible pool may be transferred as grants to local bodies.
  • Total transfers to states on the revenue account be capped at 39.5 per cent of the Centre’s gross tax revenue, compared to 37.5 per cent.

About Fiscal Correction
  • Centre should target a revenue surplus by 2014.15.
  • Combined debt of Centre and states should be capped at 68 of GDP by March 2015; currently at 82 per cent.
  • In the case of macroeconomic shocks, Centre to borrow and develop to states instead of relaxing the state borrowing limits.
  • The medium term fiscal plan should be made a statement of commitment.
About the Goods and Services Tax
  • Single rate for goods, services proposed.
  • To make, GST purely consumption based, taxes and cesses should be subsumed.
  • Petrol, diesel, alcohol, tobacco may be charged to GST with additional levies by the Centre and states.
  • Only public services, unprocessed food items, heath, education and transactions between employer and employee be exempted.

13th Finance Commission Accepted Recommendations

  • National Calamity Contingency Fund to be merged into National Disaster.
  • Response Fund and Calamity.
Grants Approved
  • Rs. 51,800 crore to eight states to meet deficits.
  • Rs. 24,068 crore to states to fund elementary education.
  • Rs. 5,000 crore each to states, for promotion of forests, renewable energy and water sector
  • Rs. 15,000 crore to states for environment.
  • Rs. 14,446 crore to states for bringing down infant mortality rate, improved delivery status of justice, and grant for unique identification programme.
Accepted in Principle
  • A model GST structure with single rate, Zero rating of exports, inclusion of various indirect taxes at central and state level in GST ambit.
  • Fiscal consolidation road map pegs combined debt of Centre and States’ at 68% of GDP by 2014- 15-45% for Centre and less than 25% for states.
  • An independent review mechanism should be set up by the Centre to evaluate fiscal reforms process.

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