Amid a raging debate between the Union government and a few southern states on devolutions of central funds, Chairman of the 15th Finance Commission NK Singh says that the spirit of the 41 percent formula for sharing of tax revenues from the divisible pool has been fully honoured by the Centre.
But, one must recognise that this "divisible pool is constituted after deducting cess and surcharges, which does not fall under the domain of the Commission," according to Singh, the head of the panel that decided the formula for sharing of tax revenues between the Centre and states for the period of 2020-2026.
Southern states, including Karnataka and Tamil Nadu, have accused the Centre of unfair treatment towards them in tax devolutions and grants-in-aid over the past few years. Responding to these allegations, Union Finance Minister Nirmala Sitharaman on February 7 said these claims are "wrong and mischievous".
One of the key functions of the Finance Commission is recommending the distribution of the net proceeds of taxes between the Union and the states as well as the allocation between the states of the respective shares of such proceeds. At present, as per the recommendation of the 15th Finance Commission, 41 percent of the divisible tax pool of the Centre is transferred to states in 14 instalments annually.
In an exclusive interview with Moneycontrol on February 8, NK Singh said, for the first time, the 15th Finance Commission, introduced demographic management criteria and lowered the weight given to population and geographical area.
"The criteria and the norms have not undergone any significant change in 70-75 years. Another criterion is the income distance method, and if we used that method more rigorously, then some of the more developed states could have suffered given their high per capita income," the former bureaucrat said.
The 15th Finance Commission introduced a parameter of 'demographic performance' as a reward for states that effectively controlled population and have had better outcomes in the sectors of education and health, including nutrition. This was done to ensure that even as the Commission shifted entirely to the 2011 census to be more responsive to existing population levels, less populous states could continue to get rewarded.
The Commission assigns weightage to the criteria of population, area, forest and ecology, income distance, tax and fiscal efforts, and demographic performance to arrive at the formula for horizontal devolution of taxes between the Union and the states.
On claims by certain states that their share in the tax pie is reducing due to Centre's increasing reliance on cess and surcharges, Singh said that one must be cognizant of the enhanced spending obligations of the central government given new and emerging geopolitical and security challenges.
At the heart of the ongoing devolution dispute seemingly lie two major claims. First, the devolution given to states has been significantly lower in the last few years compared to the recommended levels of the 15th Finance Commission. Second, the share of devolution for the less populous and fiscally stronger southern states tends to be lower, while few northern states, which are weaker on these metrics, get a larger share of central taxes.
Without diving into the North versus South debate, the former bureaucrat said that the overall debt of many of the Southern states is certainly a matter of concern. "Prudent micromanagement is also an aspect that must be taken into account. But that is for the state government to decide," Singh said.
The former bureaucrat said that in a bid to take into account their point of view, the members of the 15th Finance Commission had met all the states individually, including all southern states before and after the interim report of the panel was submitted.
"We had extensive discussions with state governments as well as political parties. Infact, we began our journey from a southern state." he added.
Read the full interview on Moneycontrol. Coming soon.
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