The Narendra Modi government is facing criticism from an unlikely quarter--the prime minister’s home state Gujarat--in its reference to the 15th Finance Commission to review the earlier Finance Commission’s decision to hike the share of states in central taxes to 42% from 32%.

In the memorandum submitted to the 15th Finance Commission during its visit last week, the Gujarat government has urged the panel to include cesses and surcharges in the divisible pool of taxes and to further increase the share of states to 50%.

In the terms of reference, the Centre has asked the 15th Finance Commission to review the 42% share granted to states in central taxes as the duties and responsibilities of the Centre has increased significantly in recent times.

Gujarat, in its submission, said the decision of the 14th Finance Commission on increasing devolution to 42% was not generous. “It includes Gadgil-Mukherjee formula grants which in 2013-14 are estimated at 5.5% of the divisible pool and discretionary sectoral grants, including environmental grants, amounting to about 2% of the divisible pool. When these are taken into account, it becomes evident that the increase in tax devolution to the states by the 14th Finance Commission was just around 2.5% of additional funds that have no conditionalities attached," it added.

Gujarat also complained that while centrally sponsored schemes were restructured from 66 to 28, the matching requirements from states had increased for most schemes to 40% from 25% earlier.

Claiming that over the years, the non-tax revenue of the Centre had increased significantly, Gujarat urged the 15th Finance Commission to recommend a mechanism to include more items in the divisible pool which may include non-tax revenues from economic services and cesses and surcharges.

“The 13th Finance Commission’s report suggested the principle of sharing profit from petroleum, offshore crude oil and gas, spectrum and other natural resources with states. Further, there is an increase in cesses and surcharges in the tax revenues of the Centre which is shrinking the divisible pool further," it added.

Earlier, the terms of reference of the 15th Finance Commission as decided by the Centre were criticized by various states that are not ruled by the BJP, especially the southern ones, as being against the spirit of fiscal federalism. The Centre has mandated to the 15th Finance Commission that population data for determining states’ share of tax revenues should be based on the 2011 Census, rather than the earlier practice of using the 1971 Census.

Puducherry, Delhi, West Bengal, Kerala, Punjab and Andhra Pradesh submitted a joint memorandum to the President on 17 May urging him to amend the terms of reference of the 15th Finance Commission, alleging that it violated “the federal principle as enshrined in the Constitution, eroded the autonomy of all states, and imposed significant financial hardship on all states.

On 20 July, replying to a question in the Lok Sabha, the finance ministry said the government had examined the changes proposed to the terms of reference. “The apprehensions raised by state governments regarding violation of the federal principles enshrined in the Constitution are misplaced. The amendment that has been suggested to the terms of reference for inclusion of Union Territories with legislature is not according to the Constitution," it said.

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