Finance panel charts course to fiscal health

Finance panel charts course to fiscal health
The Economic Times, December 31, 2009, Page 9

Kelkar-Led Commission Proposes Hike In States’ Share Of Tax Revenues

Our Bureau NEW DELHI

THE Thirteenth Finance Commission submitted its report on Wednesday, recommending a five-year fiscal consolidation road map and a higher share for states in the tax revenues collected by the Centre over the next five years ending 2015.

The commission, chaired by former finance secretary Vijay Kelkar, has recommended a higher devolution to states from the current 30.5%, and a new methodology to deal with the off-budget expenditure, especially oil bonds.

“The recommendations (of the panel) will be reflected in the Budget,” finance minister Pranab Mukherjee told reporters, but declined to give details.

The government said it would table the report of the 13th Finance Commission in Parliament in due course.

The President constitutes the Finance Commission under Article 280 of the Constitution. The commission’s chief task is to recommend a formula for distribution of tax revenues between the Centre and the states and amongst the states themselves every five years.

Currently, the share of states and Union Territories in central taxes is 30.5% of the shareable taxes of the Centre. Mr Kelkar declined to give details on the revenue share. But a government official, who did not wish to be named, said it is proposed to be increased by about 2-3%.

The recommendations are unlikely to meet states’ expectations. State governments had asked for an increase in their share in the divisible pool of the central taxes to 50%. They had also demanded that all central surcharges and cesses be included in the divisible pool.

The recommendations are based on revenue neutral rates keeping 2008-09 as the base year. “Our assumption is revenue neutral. There will not be any impact as rates would be neutral, and the revenue of states and the Centre would be protected,” Mr Kelkar said.

The report, which will be made public only after it is tabled in Parliament, has refrained from recommending a rate for the proposed goods and services tax (GST). “There’s no recommendation on the tax structure. It’s on revenue sharing between the Centre and the states ... rates were not talked about, it’s the revenue sharing,” Mr Kelkar said.

The report will be given by the President to the finance ministry, which will take it up with the Cabinet. The Cabinet will then adopt the report after which it will be tabled in the Budget session of Parliament.

The commission’s suggestions, which will cover a five-year period starting from April 1, 2010, are not binding, but they are generally implemented by the government.

The shareable central taxes include corporation tax, income tax, wealth tax, Customs, excise duty and service tax. The taxes that are not shared with states include some cesses, like for education and road.

States are budgeted to get Rs 1.64 lakh crore as their share of taxes in the current fiscal, up only marginally from revised Rs 1.60 lakh crore in 2008-09.