Govt. agrees to maintain States’ share in the divisible pool of taxes

Why in News?

Recently the Government released the Fifteenth Finance Commission (15th FC) recommendations along with the action taken report in the Parliament.

Major recommendations of 15th  FC:

Tax Devolution to States:

• The 14th FC commission recommended that states 42% share in the divisible tax pool of the centre.
• But the interim report of 15th FC reduced that to 41% from the year 2020-21 to 2024-25. This is because of the conversion of Kashmir, Jammu and Ladakh into Union Territories.
• Demographic Performance: The Commission recommended 12.5% weightage for demographic performance in its tax-transfer calculations. It has done so to reduce the fears of southern States about losing some share in tax transfers. The southern states fear due to the reliance on the 2011 Census data instead of the 1971 census. They consider the reliance on 2011 census will penalise the States that perform better in population control.

Revenue Deficit Grants:

• The commission recommended additional revenue deficit grants of ₹2.94 lakh crore for 17 States over the next five years.
  • Revenue Deficit Grants is a mechanism for the Centre to compensate for revenue loss incurred by states.

Recommendations In-Principle Approved by Government:

 Borrowing by States:

• The commission allowed a normal ceiling of net borrowing for the States at 4% of Gross State Domestic Product (GSDP) for the year 2021-2022. A portion of this ceiling will be spent on incremental capital expenditure.
• An additional borrowing ceiling of 0.5% of GSDP will also be provided based on meeting specified reforms in the power sector.

Modernisation Fund for Defence and Internal Security

• Purpose::It will be a dedicated non-lapsable fund to bridge the gap between projected budgetary requirements and allocation for defence and internal security.
• Purpose: The proceeds from the fund will be used for:
  • Capital investment for modernisation of defence services.
  • Capital investment for central armed police forces and modernisation of state police forces.
  • The small component as a welfare fund for soldiers and paramilitary personnel.
• Duration: The total indicative size of the fund has been proposed at Rs 2.38 lakh crore for the 2021-26 period.
• Funding: The fund will receive partial funding from the Consolidated Fund of India partially using receipts from the disinvestment of defence public sector enterprises and land monetisation.
• Nodal Ministry: The Ministry of Defence will have exclusive rights over the use of the funds money.The government can also operate the fund through a high-powered committee.

Other Key Recommendations of the commission:

• Fiscal Deficit:
  • Centre: The fiscal deficit should be 6% in 2021-22, 5.5% in 2022-23, 5% in 2023-24, 4.5% in 2024-25 and 4% in 2025-26.
  • States: The commission has said that states are expected to reach a fiscal deficit of 3% of GSDP by 2023-24 and maintain that level till 2025-26.
• The health spending by states should be increased to 8% of their budget by 2022.
• Annual grants worth Rs 1,200 crore be awarded between FY23 and FY26 for incentivising states to enhance educational outcomes.
• Disaster mitigation funds should be set up at both national and state levels, in line with provisions of the Disaster Management Act.

Source: The Hindu