13TH Finance Commission

The Finance Commission is constituted by the President under Article 280 of the Constitution. Its main work is to give recommendations on distribution of central tax revenues between the Union and the States.


Terms of Reference 

The Commission was asked to make recommendations on the following matters:

• The distribution of taxes collected between the centre and the states.
• The principles determining the grants-in-aid to states out of the Consolidated Fund of India and the sums to be paid to states.
• The measures needed to augment the Consolidated Fund of a state to supplement the resources of Panchayats and Municipalities.
• To review the state of the finances of the centre and the states in light of      the operation of the States’ Debt Consolidation and Relief Facility, this was   introduced on the basis of the recommendations of the previous Finance Commission.
• To review the present arrangements regarding financing of disaster management.
• To suggest a new roadmap for fiscal consolidation in the period 2010 – 2015.

Recommendations

• The share of states in net proceeds of shareable central taxes shall be 32 per cent in each of the financial years from 2010-11 to 2014-15.  Actual share in the tax revenue of the Centre which is devolved to states: The Eleventh and Twelfth Commissions had recommended that the share of states be fixed at 29.5% and 30.5% respectively, of central taxes. However, the actual shares devolved to states have been lower than recommended by previous finance commissions.  Decrease in Subsidy for power sector and large dominance of centrally sponsored scheme is necessary to restore the predominance of fund-transfers based on Planning Commission recommendations.


• The Commission has recommended the adoption of the GST and formulated a model GST. The main features of the model GST are:
a) The central portion of the GST would include (a) central excise duties, (b) service tax, (c) additional customs duties, (d) all surcharges and cesses.
b) The state GST would include (a) VAT, (b) central sales tax, (c) cesses and surcharges, and others such as luxury tax, lottery tax, stamp duties, etc.
c) There would be special provisions for certain goods such as petroleum, and exemptions would be allowed only on the basis of a common list applicable to all states and the centre.
d) GST should be implemented by all states and the centre at the same time.

To provide incentives to states to agree to the model GST, the Commission has recommended the implementation of a Grand Bargain. The Grand Bargain envisages a grant of a total of Rs. 50,000 crore to be provided to all states. This amount would be distributed among states subject to the model GST framework being adopted by all states. This grant would be used to compensate states for revenue losses on account of implementing GST. This amount should not be distributed if states cannot reach a consensus on implementing GST. The Empowered Committee of State Finance Ministers (EC) should be given statutory status. The compensation should be disbursed in quarterly installments on the basis of recommendations by a three-member Compensation Committee. The Compensation Committee should comprise of the Secretary, Department of Revenue of the central government, Secretary to the EC, and an eminent person with experience in public finance.

• The central government has recently decided that proceeds from disinvestment shall be used fully as capital expenditure for social sector programmes. This policy needs to be liberalised and proceeds should also be used for augmenting critical infrastructure and environment related projects.


• The practice of diverting plan assistance to meet non-plan needs of special category states should be discontinued.


• For PSUs: All accounts and backlogs of PSU accounts should be cleared by states; States need to draw a roadmap for closure of non-working PSUs by March 2011. Divestment and privatization of PSUs should be considered and actively pursued.


• For Power Sector: Reduction of Transmission and Distribution (T&D) losses should be attempted, Unbundling needs to be carried out on priority basis and open access to transmission strengthened, Proper systems should be put in place to avoid delays in completion of hydro projects, Regulatory institutions should be strengthened through capacity building, consumer education and tariff reforms.


• Regarding reforms in the area of pensions, a switch to the New Pension Scheme needs to be completed at the earliest.


• Revised roadmap for fiscal consolidation

a) Central government 
I. The revenue deficit of the Centre needs to be progressively reduced and eliminated, followed by emergence of a revenue surplus by 2014-15.
II. A target of 68 percent of GDP for the combined debt of the centre and states should be achieved by 2014-15.
III. The government should list all public sector enterprises that yield a lower rate of return on assets than a norm which should be decided by an expert committee.
IV. An independent review mechanism should be set-up by the Centre to evaluate its fiscal reform process.

b) State governments: 
I. States should be able to get back to the path of fiscal consolidation after the disruption caused in 2008 09, and 2009-10. States with zero revenue deficit or revenue surplus in 2007-08 should eliminate revenue deficit by 2011-12. Other states should do so by 2014-15.
II. General category states with zero revenue deficit in 2007-08 should achieve a fiscal deficit of 3 percent of GDP by 2011-12. Other states should do so by 2013-14.
III. States should amend/enact Fiscal Responsibility and Budget Management Acts to build on the fiscal reform path worked out.
IV. State-specific grants recommended for a state should be released upon compliance.
V. Borrowing limits for states to be worked out by Finance Ministry using the fiscal reform path, thus acting as an enforcement mechanism for fiscal correction by states.
VI. Loans from the central government to states and administered by ministries/departments other than Ministry of Finance, outstanding as at the end of 2009-10, should be written off.

• For Local Bodies:
a) Local bodies should be transferred 2.28% of the divisible pool of taxes (over and above the share of the states), after converting this share to grant-in-aid under Article 275.
b) Article 280 (3) (bb) & (c) of the Constitution should be amended to make the recommendations of the State Finance Commissions less binding on state governments.
c) Article 243(I) of the Constitution should be amended to empower states governments to constitute and direct state Finance Commissions to give their report before the National Finance Commission finalizes its report.
d) State governments should strengthen their local audit departments through capacity building.
e) Bodies similar to the SFC should be set up in states which are not covered by Part IX of the Constitution (Panchayats).
f) Local Bodies should be associated with city planning functions

• Disaster Relief
a) Assistance of Rs 250 crore to be given to the National Disaster Response Force (NDRF) to maintain an inventory of items required for immediate relief.
b) Provisions relating to the District Disaster Response Fund in the Disaster Management Act may be reviewed and setting up of these funds left to the discretion of the individual states.
c) The list of disasters to be covered under the scheme financed through FC grants should remain as it exists. However, man-made disasters of high-intensity may be considered for NDRF funding.

• Grants-in-aid to States 
a) Non-Plan Revenue Deficit: Eight special category states (Arunachal Pradesh, Himachal Pradesh, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland and Tripura) have non-plan revenue deficits. For these states grant of Rs 51,800 crore is recommended.
b) Elementary Education: A grant of Rs 24,068 crore is recommended for elementary education over the award period. The education grant will be additional to the normal expenditure of the states for elementary education.
c) Environment:  An amount of Rs 5000 crore is recommended as forest grant for the award period.  Twenty five per cent of the grants in the last three years are for preservation of forest wealth.  An incentive grant of Rs 5000 crore is recommended for developing grid-connected renewable energy based on the states’ achievement in renewable energy capacity addition from 1 April 2010 to 31 March 2014. An amount of Rs 5000 crore is recommended as water sector management grant for four years.
d) Improving Outcomes: States should be incentivised to enroll residents who participate in welfare schemes within the Unique Identification (UID) programme. A grant of Rs 2989 crore is proposed to be given to State Governments.
e) A grant of Rs 5000 crore is recommended for reducing their Infant Mortality Rates.
f) A grant of Rs 5000 crore is proposed to support improvement in a number of facets in the administration of justice.
g) A grant of Rs 10 crore will be provided to each general category state and Rs. 5 crore to each special category state to set up an employees’ and pensioners’ data base.
h) Maintenance of Roads and Bridges: An amount of Rs 19,930 crore has been recommended as grant for maintenance of roads and bridges for four years. This is additional to the normal expenditure incurred by states.
i) State-specific needs: A total grant of Rs 27,945 crore is recommended for state-specific needs. Release of this grant and expenditure will be subject to certain conditions.