New Delhi: State governments that maintain fiscal prudence and succeed in widening the tax net should be rewarded with a higher share of central taxes, the 13th Finance Commission (TFC) recommended in its report released on Thursday.
The report raised the weightage given to fiscal discipline in deciding a state’s share of central taxes to 17.5%, from 7.5% suggested by the 12th Finance Commission, offering a bigger incentive to state governments to shun financial profligacy.
The TFC has proposed to raise the share of states from the current 30.5% to 32% of the divisible tax pool of the Centre. That’s short of the 50% sought by state governments that had also asked for a share of central cesses and surcharges that does not accrue to them.
Graphic: Yogesh Kumar/Mint
“While the 12th Finance Commission gave highest weightage to per capita income distance of states, comparing low per capita income states with the top rankers, the 13th Commission has factored that in, besides proposing to reward states making more tax efforts,” said a person closely associated with the TFC report who did not wish to be identified.
The Finance Commission recommends how all direct and indirect taxes Central taxes—except surcharges and cesses—should be shared between the Centre and the states, as well as between states, based on their needs.
The so-called special category states, or poor states that need special attention, also stand to gain a better share of central taxes for making an extra effort to improve their fiscal position, the person cited above said.
The fiscal performance of special category states such as those in the northeast will be compared with one another and not other states, ensuring they do not lose out. Tribal areas will also be offered incentives.
The TFC has recommended that a weightage of 25% be asssigned to population—same as that suggested by its predecessor. The Commission’s terms of reference have, however, forced it to follow the 1971 Census, which may not reflect the current population scenario. Similarly, the weightage assigned to area remain the same at 10%.
Some experts doubt whether the TFC’s recommendations will push the aim of returning the nation to the path of fiscal correction.
“The 13th Commission recommendations are certainly an advancement over the earlier ones, but the basic methodology has not changed,” said Govind Rao, director, National Institute of Public Finance and Policy, a New Delhi-based think tank. “At the end of the day states will be doled with grants even if they don’t perform.”