New Delhi: The 15th finance commission will be reviewing the enhanced tax devolution formula, which determines the share of states in national taxes.
“The terms of reference or ToR (of the ) would have to be addressed. Which implies that a review (of the devolution formula) will be undertaken," N.K. Singh, chairman of the 15th finance commission said while responding to a question during a media briefing.
The 14th finance commission had increased the share of states in net taxes to 42% from the previous level of 32%. The terms of reference of the 15th finance commission specifically require it to review this and ascertain its impact on the fiscal capability of the Union government.
Singh’s observations come in the backdrop of some states expressing disquiet about the terms of reference of the new Commission—set up every five years to decide the sharing of tax resources between the centre and states.
Haseeb Drabu, finance minister of Jammu and Kashmir, questioning the terms of reference of the commission, said that they were loaded in favour of the Union government.
In a signed piece published in Mint on 27 February, he wrote: “Some of the ToR given to the 15th Finance Commission are inimical to and potentially dangerous for the existing fiscal federal system."
Specifically referring to the clause in the terms of reference pertaining to the devolution formula, Drabu added, “This is a value judgment based on a half truth which is masquerading as a ToR. By putting in such a leading and loaded terms of reference, institutional propriety has been seriously compromised."
Asked to respond to Drabu’s charge, Singh said, “We have no say in framing the terms of reference. But we are expected to address them. If the President chooses to alter or modify the terms of reference then it is left to the President’s wisdom."
Further, the 15th finance commission will also be exploring whether the imposition of cess—receipts from which are retained by the government—are distorting the devolution of taxes between the centre and states.
The commission, said a person familiar with the developments, has commissioned two studies to examine the legality of the cess as part of the larger question on what constitutes a shareable tax. “Over time the idea of the divisible pool has expanded. So clearly there was no binding definition," this person said.
Experts said that despite higher devolution to states from the centre’s divisible pool of taxes under the 14th Finance Commission, a decline in states’ social sector spending, especially in health and education, has been noted.
“States would like the higher devolution of central taxes to continue, while at the same time, expecting the centre to have responsibility on its social sector spending. This could have a huge impact on the Union budget, quality of spending and growth," said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy.