Finance panel suggests new path for fiscal consolidation: Kelkar

Finance panel suggests new path for fiscal consolidation: Kelkar

New Delhi: The Finance Commission, which makes recommendations on sharing of tax revenues by the Centre and States, has suggested a new path for fiscal prudence in its report submitted to President Pratibha Patil on Wednesday.

“We had been asked to suggest new path for fiscal consolidation...we have recommended fiscal path for the next five years (2010-15)," Finance Commission chairman Vijay Kelkar told reporters at his office.

The government had last year consigned the Fiscal Responsibility and Budget Management (FRBM), the self-imposed fiscal prudence guidelines, to the backburner when it stepped up official spending beyond its means in order to insulate the economy from the global financial meltdown.

Fiscal deficit, a reflection of government borrowings, is estimated to touch 6.8% in 2009-10, up from 6.2% in the previous fiscal, mainly on account of the stimulus measures.

The recommendations of the 13th Finance Commission, finance minister Pranab Mukherjee said, “would be getting reflected in the 2010-11 budget (to be presented in the Lok Sabha in February next year)."

The report, Kelkar said, “Dealt with sharing of tax revenue between center and states, distribution of funds among states and support to local bodies."

The Finance Commission report assumes significance in view of the ongoing reforms in indirect and direct taxes, which will have a bearing on the tax collections.

The government proposes to introduce the Goods and Services Tax (GST) which will subsume levies like excise, VAT and service tax from 1 April, next year.

The Direct Taxes Code, which will replace the Income Tax Act, 1961, is currently in the public domain for debate and suggestions.

As required by the Constitution, the Finance Commission was set up in November 2007 to suggest devolution of tax receipts between the Centre and the states.

The government extended the term of the Commission in September 2009 up to January end and requested it to submit the report by December so as to give effect to its suggestions in the budget.

Besides chairman, other members of the commission are B K Chaturvedi, Indira Rajaraman, Atul Sarma and Sanjiv Misra.

The report, after being adopted by the Cabinet, will be tabled in Parliament.

Currently, states and the union territories get Rs1.64 trillion in a year, or around 30% of the shareable taxes collected by the Centre.

The total tax revenue of the government, which include shareable and non-shareable taxes, has been estimated at Rs6,41,079 crore during 2009-10.

The Twelfth Finance Commission had recommended that 30.5% of the shareable central taxes should be shared among the states and the union territories.

The shareable central taxes include corporation tax, income tax, wealth tax, customs, excise duty and service tax. The taxes, which are not shared with states include some cesses like education and road.

Among other things, the 13th Commission has also suggested steps to deal with the growing off-budget expenditure, especially, oil bonds. These expenses are not reflected in the normal budgetary process but do increase the liability of the government.

During 2008-09, the off-budget expenses, mainly on account of oil bonds, had been estimated at 0.8%t of the Gross Domestic Product (GDP).

The report, likely to be made public in February before the budget, also looked at the implications of environment and climate change, ways to improve outcomes and outputs of public expenditure, and impact of GST on trade, Kelkar said.

“There’s no recommendation on the tax structure. It’s on the revenue sharing between the Centre and the states ... rates were not talked about, it’s the revenue sharing," he said.

However, Kelkar said the commission did give its views on the share of the states and union territories in the central taxes, which at present is 30.5% of the shareable taxes of the Centre.

“We have recommended a share, which will be the share between the Centre and the states of the centrally collected taxes," he said.

The report is based on the 2008-09 tax collections and does not talk on post-GST scenario. However, implementation of the new indirect tax regime next year would not be a concern as suggestions are based on revenue neutral rates, he said.

“Our assumption is revenue neutral. Fortunately, in GST, both the Centre and the states wanted revenue neutral rates. There won’t be any impact as rates would be neutral, and the revenue of states and centre would be protected," he said.

Kelkar added that the Commission has made recommendations on all the Terms of References (TORs) and the report runs into two volumes. While the second volume is solely for annexure, the first volume runs into 250 pages.