NITI Aayog examined various human development indices of states and decided to recommend to the Fifteenth Finance Commission that the social development goal (SDG) performance of states may be used as a criteria to allocate a small percentage of the divisible tax pool of taxes to different states. Photo: Pradeep Gaur/Mint
NITI Aayog examined various human development indices of states and decided to recommend to the Fifteenth Finance Commission that the social development goal (SDG) performance of states may be used as a criteria to allocate a small percentage of the divisible tax pool of taxes to different states. Photo: Pradeep Gaur/Mint

Finance panel should reward performing states: NITI Aayog

The formula for devolution of taxes to states has to include some performance-based criteria so that those states which have done better should not be punished, says Rajiv Kumar, vice-chairman, NITI Aayog

New Delhi: Federal policy think tank NITI Aayog has pitched for a formula for the central government to share its divisible pool of taxes with states in a way that does not go against the interest of states that have performed well on social development. This, however, could be best achieved gradually, considering the political sensitivity around resource allocation in a federal set-up, according to Rajiv Kumar, vice-chairman, NITI Aayog.

Addressing industry leaders at the annual session of Confederation of Indian Industry (CII), Kumar said, “I think it is clear the formula (for devolution of taxes to states) has to include some performance-based criteria so that those states which have done better in certain parameters should of course not be punished," said Kumar.

The terms of reference of the Fifteenth Finance Commission (FFC) chaired by former revenue secretary N.K. Singh suggesting use of census data of 2011 for allocation of resources, against 1971 census data used earlier, prompted south Indian political leaders including Karnataka chief minister Siddaramaiah to express concern that there is no incentive for achieving development.

Mint reported on 16 January quoting 2011 census that population growth rate in states like Karnataka, Andhra Pradesh and Tamil Nadu are among the lowest in the country and that north Indian states such as Bihar and Chhattisgarh with higher rates of population growth may become relative winners in the Commission’s award.

NITI Aayog examined various human development indices of states and decided to recommend to the Fifteenth Finance Commission that the social development goal (SDG) performance of states may be used as a criteria to allocate a small percentage of the divisible tax pool of taxes to different states.

However, the scenarios the think tank forecast also showed that going by SDG, it is the more backward or populous states that will lose some allocation, which could become a thorny issue between some backward states and the centre. NITI Aayog, therefore, favours a gradual adoption of performance as a criterion for tax devolution.

“It is a better deal now to start the process of building in some performance indicators for the devolution of funds and then phase it in over time so that people will get used to it," said Kumar, describing the gradual adoption of performance criteria a kind of vaccination meant to make the system more resilient.

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