New India formula? 

New India formula? 

Context

The 15th Finance Commission’s job will be especially tricky in the time of GST

What

• The Centre has moved swiftly to notify the presidential order setting up the Fifteenth Finance Commission, within five days of the Cabinet’s approval
• The constitutional body is tasked with recommending a fiscal road map and a sharing of resources between the Centre and the States

Timeframe

The Commission has less than two years to complete its deliberations and submit its report by October 2019, giving the government a little over a quarter to consider and implement its recommendations for the period from April 2020 to March 2025

14^th Finance Commissions’ recommendation accepted

Accepting the 14th Finance Commission’s recommendation to raise the States’ share in the divisible pool of taxes to 42% from the previous 32% level, Prime Minister Narendra Modi had told Chief Ministers that although this meant less money at the Centre’s disposal, his government had decided to strengthen the States’ capacity to move away from a ‘one-size-fits-all’ approach.

Factoring in the Impact

The Centre has urged the Commission to finalise its tax-devolution formula after factoring in the impact on the Union’s fiscal situation

Centre Seeking Rollback

Taken together with its need for resources for essential spending in areas such as defence, security, infrastructure and climate change, the Centre seems to be seeking a rollback of the 42% share for States

Dent in Co-operative Federalism

The government’s top brass has repeatedly asserted the need for revenue to maintain public spending in the face of flak for high petroleum taxes. But a reduction from the 42% rate could dent States’ faith in the Centre’s claims of cooperative federalism.

GST offers a tricky challenge

• The Centre is committed to compensating States for any revenue losses arising out of GST implementation till June 2022, thus covering nearly half the period for which the Commission is to recommend a formula
• Its mandate includes formulating performance-linked incentives for States on a range of desirable outcomes such as attaining a replacement rate in population growth, deepening the GST net and improving the ease of doing business.

Conclusion

Devising a fiscal nudge for development goals sounds attractive, though the challenge would lie in quantifying the good from the ugly, especially when one has to reward a State for showing ‘control or lack of it in incurring expenditure on populist measures