Article 280 of the constitution of India gives President of
India the power to constitute the finance commission every five years. If the
President thinks it is required earlier it can give the order to constitute it
even earlier as well. The Finance Commission is required to recommend the
distribution of the net proceeds of taxes of the Union between the Union and the
States (commonly referred to as vertical devolution); and the allocation between
the States of the respective shares of such proceeds (commonly known as
horizontal devolution). Though recommendations of finance commission are
non-binding, the Centre generally accepts the recommendation of the expert body.
Fourteenth finance commission under the chairmanship of former RBI governor
Y.V.Reddy has submitted its report for the period of 2015-2020. Report was
submitted to central government with a dissent note from Abhijit sen and central
government has accepted the recommendation.
States share from the net proceeds from the central tax
collection to be 42 percentage, which is a huge jump of 10 percent from the
32 percent recommended by the 13th finance commission. As compared to the
total devolutions in 2014-15 the total devolution of the States in 2015-16
will increase by over 45%. This change in share has become possible because
planning commission has been abolished and its funds have been transferred
to finance commission and ministries.
FFC has taken the view that tax devolution should be
primary route of transfer of resources to States. The government has
accepted the recommendations keeping in mind the spirit of National
Institution for Transforming India (NITI). It may be noted that in reckoning
the requirements of the States, the FFC has ignored the Plan and Non-Plan
Tax devolution with in the states will be based on the
factors of Area, population, Demography, Income distance and forest cover.
Individual weight among those is- 50 per cent is given to distance from the
highest per capita income district, followed by population (1971 census) at
17.5 per cent, changes of population since 1971 at 10 per cent, area at 15
per cent and forest cover at 7.5 per cent.
Finance commission has recommended that Fiscal Deficit of
Union government should be 3.6 per cent of GDP in 2015-16 and 3 per cent the
year after. Three percentage fiscal deficit should be kept for three
following years. Finance commission has also recommended that revenue
deficit to come down from 2.9 per cent in FY15 to 2.56 per cent in FY16 and
then progressively reduce to 0.93 per cent by 2019-20.
Fourteenth Finance Commission(FFC) has recommended
distribution of grants to States for local bodies using 2011 population data
with weight of 90% and area with weight of 10%. The grants to States will be
divided into two, a grant to duly constituted Gram Panchayats and a grant to
duly constituted Municipal bodies, on the basis of rural and urban
population. FFC has recommended grants in two parts; a basic grant, and a
performance grant, for duly constituted Gram Panchayats and municipalities.
The ratio of basic to performance grant is 90:10 with respect to Panchayats
and 80:20 with respect to Municipalities.