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The Finance Commission can be described as an organisation set up by the President of India to provide recommendations on the country’s central-state financial ties. Two reports were requested from the 15th Finance Commission. On February 1, 2020, the first report, which included guidelines for the fiscal year of 2020-21, was presented in the Parliament to explain the financial relationships in India. State tax collected by the government was expected to be reduced to 41% in 2021-22, from the earlier 42 %. This 1% reduction comes from one state becoming two new union territories, Ladakh and J&K.
Financial Relationship in India
Let’s learn something about the financial relationships in India.
It was recommended that Jammu & Kashmir and Ladakh be given 42% of the portion. They get this portion from the divisible tax pool, which was centred on the time period of 2021-2026 by the 15th Finance Commission of India. The Parliament’s report also tends to keep the unchanged criteria of horizontal devolution, with 12.5% weight on demographic and 15% change on the population.
Except for the union territories of Jammu and Kashmir and Ladakh, the tax deconcentration rate, which was introduced by the Finance Commission, is 41%. This 41% is of the total divisible pool. However, this 41% comes after deducting many charges like the cost of collection of tax and cesses and surcharges.
The Finance Commission has recommended 3 lakh crores of post-devolution revenue deficit grants over the 5 years.
Apart from this, the Finance Commission has recommended higher grants of 1.3 lakh crores in eight different sectors, including higher education, school education, aspiring neighbourhoods and blocks, health, statistics, judiciary and the Pradhan Mantri Gram Sadak Yojana roads.
Finance Ministry’s Decision
The Ministry of Finance has not passed the guidelines yet, though it has been considering them.
The Glide Path Report calculates the asset allocation and investment portfolio changes over time.
The report states that the fiscal deficit (government income to spending ratio) should be
- 6% in 2021-2022
- 5.5% in 2022-2023
- 4.5% in 2025-26
This deficit is lower than the projected year’s budget proposed by the Finance Minister.
The Commission was also urged to suggest innovations for performance in states. It did so in the areas of solid waste management, power sector, and management, adoption of DBT, internal security, and the funding mechanisms for defence & internal security structure.
The Commission recommended a 2.38 lakh crores fund for the defence sector as well.
It clearly stated that the amount from the budgetary allocations to the Ministry of Defence and Ministry of Home Affairs that is not utilised for a capital expenditure shall not be part of the fund.
The report suggested that 1.5 lakh crores can be delivered to the MFIs from the India Consolidated Fund.
The remaining corpus can be recovered with the help of disinvestment, which was preceded by the defence public sector enterprises. It further proceeds from the surplus monetisation of land and defence land receipts.
The 15th Finance Commission Report states that while the shareable pool of tax revenue in the budget is 41%, the actual budgeted share is 30% of gross tax revenue. This is due to the share of cesses, surcharges and other portions that are not part of the divisible pool.
Non-Lapsable Defence fund
The proposal of creating a non-lapsable fund for the defence within India’s public account has been accepted by the Central Government. The examination of the source of income and other modalities will be done in due course of time. The examination will be organised by the sources, which are highly placed in the Finance Ministry.
The financial relationship in India between the centre and states
Articles 264 to 293 of Part XII of the Constitution, which deal with the financial links between the states and the centres, address recent developments in the country’s financial relations between the Centre-State. As India is a federal republic, it follows the separation of powers regarding taxation, with the centre in charge of providing funds to the states. This document has addressed all of these provisions. The ability of the centre and the states to charge taxes is discussed in Schedule VII. It also contains many other laws governing the federal government’s collection and distribution of taxes and grants to states and surcharges.
Conclusion
One of the essential components of federalism in India is the relationship between the centre and the states. To safeguard the safety and well-being of Indian citizens, the central government and state governments collaborate. They collaborate in various sectors, including environmental protection and socio-economic planning.
The Indian constitution tries to reconcile financial relationships in India and national unity while providing state governments with the power to preserve the state. As a result, it is acceptable to infer that the Indian Constitution is largely federal, even though it contains distinctive aspects that allow it to take on unitary characteristics when necessary.
