he Fifteenth Finance Commission has obtained the legal opinion of veteran lawyer K. Parasaran on the creation of a non-lapsable defence fund, said chairman N.K. Singh (Photo: HT)
he Fifteenth Finance Commission has obtained the legal opinion of veteran lawyer K. Parasaran on the creation of a non-lapsable defence fund, said chairman N.K. Singh (Photo: HT)

Fifteenth Finance Commission prepares defence funding framework

  • The idea of a non-lapsable defence fund has been mooted by a Parliamentary Standing Committee
  • This, because defence procurement and acquisition involves long gestation periods and funds allocated for capital acquisition in a particular fiscal are returned if not exhausted in that year

New Delhi: Every Indian citizen should contribute towards funding the defence and internal security needs of the country, according to a legal opinion obtained by the Fifteenth Finance Commission (FFC).

The commission has obtained comprehensive legal opinion on the issue from veteran lawyer K. Parasaran, FFC chairman N.K. Singh said in an interview. If FFC accepts the legal advice, the commission’s final report to be presented in October could well seek the creation of a non-lapsable defence and internal security fund.

“Parasaran has opined that it (funding for defence and internal security) transcends any definition of classification. He has traced the evolution of the world through Vedas, Puranas and Arthashastra, that this is the primary obligation of every citizen of India, obligation for which he must contribute in some way or the other to ensure security and stability of India. This transcends in a way the artificial constructs (of Centre and states)," added Singh.

In an amendment to the Terms of Reference (ToR) of FFC, the government in July last year asked it to “examine whether a separate mechanism for funding of defence and internal security ought to be set up and if so how such a mechanism could be operationalized".

Since defence procurement and acquisition involves long gestation periods and funds allocated for capital acquisition in a particular fiscal are returned if not exhausted in that year, a non-lapsable fund will ensure assured supply of funds when needed.

FFC has constituted a committee under its chairman to take a final call on the matter. The home secretary, defence secretary and expenditure secretary will be members of this committee.

“The (finance) ministry has proposed setting up a non-lapsable fund, levy of cess, monetization of surplus land and other assets, tax-free defence bonds and utilizing the proceeds of disinvestment of defence public sector undertakings," said the first report of FFC tabled in Parliament on 1 February.

States had earlier objected to the ToR fearing that instead of a two-way distribution of net central taxes between the Centre and states, such a fund could reduce their share if a three-way distribution is carried out by FFC.

“Constitutionally, defence is in the Union list, not in the state list. If you do a carve-out for defence, who gets to control the money? Do you then have some sort of a defence board in which there are states’ representatives? It will open up a whole can of worms. It will almost certainly be challenged by states," former principal economic adviser in the Planning Commission Pronab Sen said in December.

However, Singh said how the government should reshuffle its own assets is something entirely for it to decide. “So if the argument is all cess and all surcharge is a shrinkage on the net divisible pool, that is by definition correct. But to make it part of the divisible pool, you need a constitutional amendment for which it is for people to seek that constitutional amendment. I am not saying I am having a cess, I am saying these are all the ingredients, which could be considered by the committee when they suggest one way or the other of having a non-lapsable fund for imparting stability and predictability to the finance defence capital expenditure."

The idea has been mooted by the Parliamentary Standing Committee on Defence repeatedly through its various reports. While the defence ministry was initially not in favour of the proposal for constituting a “Non-lapsable Defence Capital Fund Account", it agreed to the proposal in 2017.

However, the Parliamentary Standing Committee on Defence in its report for 2018-19 stated that the finance ministry did not agree to the proposal by the defence ministry, holding that moving general revenue out of the Consolidated Fund of India and parking in a corpus fund is against the spirit of Article 266(1) of the Constitution and that balances available in the non-lapsable funds will not be available to the defence ministry automatically. “It requires Parliament’s sanction through Demands for Grants of Ministry of Defence for being spent on Defence Capital Expenditure. Hence, mere creation of non-lapsable funds yields no additional advantage to Ministry of Defence and could rather induce complacency in incurring expenditure," it added.

The Standing Committee, however, observed that even if certain financial rules and regulations have to be amended for creation of the non-lapsable fund to meet the requirements of the defence forces, it can and should be done in the interest of the nation without getting embroiled in complicated financial discourse. “The Committee would like the Ministry of Finance to shun their rigid stance on the issue of creation of a ‘Non-lapsable Defence Capital Fund Account’ and come up with a solution in consultation with the Ministry of Defence," it added.

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