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15th Finance Commission Report

The Finance Commission and its purpose

Article 280 of the Constitution requires that a Finance Commission be constituted.

To recommend the distribution of the net proceeds of taxes between the Center and states, and among the states.

The formula for sharing revenues is decided by the Finance Commission every five years.

This time, however, the 15th Finance
Commission will decide the formula for six years.

The 15th Finance Commission (Chair: Mr N. K. Singh) was required to submit two reports.

The first report, consisting of recommendations for the financial year 2020-21, was tabled in Parliament on
February 1, 2020.

The final report with recommendations for the 2021- 26 period will be submitted by October 30, 2020.

KEY RECOMMENDATIONS IN THE FIRST REPORT (2020-21 PERIOD)

Devolution of taxes to states:

• The share of states in the centre’s taxes is recommended to be decreased from 42% during the 2015-20 period to 41%
for 2020-21.

• The 1% decrease is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the central government.

GST implementation:

Income distance: Distance of the state’s income from the state with the highest income.

Demographic performance: States with a lower fertility ratio will be scored higher on this criterion.

Forest and ecology: Share of dense forest of each state in the aggregate dense forest of all the states.

Tax effort: Reward states with higher tax collection efficien

Special grants: Karnataka, Mizoram, and Telangana will receive special grants aggregating to Rs 6,764 crore.

RECOMMENDATIONS ON FISCAL ROADMAP

Fiscal deficit and debt levels:

The Commission noted that recommending a credible fiscal and debt trajectory roadmap remains problematic due to uncertainty around the economy.

Both central and state governments should focus on debt consolidation and comply with FRBM Acts.

Off-budget borrowings:

The Commission observed that financing capital expenditure through off-budget borrowings detracts from compliance with the FRBM Act.

Both the central and state governments should make full disclosure of extra-budgetary borrowings.

Statutory framework for public financial

The Commission recommended forming an expert group to draft legislation to provide for a statutory framework for
sound public financial management system.

Tax capacity:

In 2018-19, the tax revenue of state governments and central government together stood at around 17.5% of GDP.

India’s tax capacity has largely remained unchanged since the early 1990s.

GST implementation:
The Commission highlighted some challenges with the implementation of the Goods and Services Tax (GST).

(i) Large shortfall in collections as compared to original forecast,

(ii) High volatility in collections,

(iii) Accumulation of large integrated GST credit,

(iv) Glitches in invoice and input tax matching,

(v) Delay in refunds.

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