{"id":260026,"date":"2023-09-14T20:51:59","date_gmt":"2023-09-14T15:21:59","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=260026"},"modified":"2023-09-14T20:51:59","modified_gmt":"2023-09-14T15:21:59","slug":"haseeb-drabu-writes-what-the-16th-finance-commission-needs-to-do-differently","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/haseeb-drabu-writes-what-the-16th-finance-commission-needs-to-do-differently\/","title":{"rendered":"Haseeb Drabu writes: What the 16th Finance Commission needs to do differently"},"content":{"rendered":"\n

Source<\/strong>– The post is based on the article \u201cHaseeb Drabu writes: What the 16th Finance Commission needs to do differently\u201d <\/strong>published in \u201cThe Indian Express\u201d <\/strong>on 14th September 2023<\/strong>.<\/p>\n

Syllabus: <\/strong>GS2 – Issue pertaining to federalism. GS3- Government budgeting<\/p>\n

News<\/strong>– The article highlights the need for relook at federal fiscal transfer due to the introduction of GST.<\/p>\n

Why is there a need for reconsideration of federal fiscal transfer\u00a0 after the implementation of GST?<\/strong><\/h2>\n

Earlier, the taxation system was based on production<\/strong>. Now, it is centered on consumption<\/strong>. It alters the dynamics of federalism <\/strong>both vertically and horizontally.<\/strong><\/p>\n

Previously, the central sales tax<\/strong> shifted the tax burden<\/strong> from wealthy manufacturing states to consuming states<\/strong>. It contributed to horizontal imbalances. <\/strong><\/p>\n

Now, the destination principle<\/strong> ensures that consuming states<\/strong> benefit at the expense of industrialized ones. The IGST levied during interstate supply<\/strong> of goods or services is transferred to the destination state. <\/strong><\/p>\n

This transition from the origin-based tax principle to the destination-based principle<\/strong> is reshaping the power balance<\/strong> among states.<\/p>\n

However, the federal fiscal transfer system<\/strong> remains structured for the origin-based tax era<\/strong>. Its criteria for distribution<\/strong> also adhere to the previous system.<\/p>\n

What should be the way forward for the 16th Finance Commission?<\/strong><\/h2>\n

The upcoming formation of the 16th Finance Commission should include a mandate to reassess the principles governing tax distribution.<\/strong> It should take into account the changed landscape of fiscal federalism in India.<\/p>\n

Its terms of reference <\/strong>should reflect the consolidation and inclusion <\/strong>of the indirect tax base shared by both the Union and the states.<\/p>\n

There is a need for reconsideration of the statutory sharing of indirect taxes,<\/strong> both in terms of vertical and horizontal distribution. <\/strong><\/p>\n

To align the principle of vertical distribution<\/strong> with the new system, it’s crucial to redefine the divisible pool. <\/strong><\/p>\n

For example,<\/strong> the 16th Finance Commission will need to specify how IGST<\/strong> can be fully integrated<\/strong> into this pool. Currently, only IGST without any input tax credit<\/strong> is shared with the states.<\/p>\n

There should be a standardized basis <\/strong>for including unsettled IGST with credit in transition<\/strong> into the divisible pool. <\/strong><\/p>\n

The altered administration of GST has led to a substantial increase and considerable variation in the reported cost of tax collection<\/strong>. It is ranging from 7% to 10%.<\/p>\n

Therefore, the SFC should recommend a method for calculating and distributing<\/strong> the cost of collecting indirect taxes <\/strong>and proposing ways to reduce these costs and enhance collection efficiency.<\/strong><\/p>\n

Regarding horizontal distribution<\/strong>, the criteria for distributing the divisible pool<\/strong> among states will need to be reexamined.<\/p>\n

The existing criteria have evolved in the context of a production-based tax system<\/strong>. This needs to be reconfigured to suit a consumption-based tax system<\/strong>.<\/p>\n

The SFC should evaluate the necessity for GST compensation<\/strong>. It’s crucial to reassess the need, feasibility<\/strong> of the compensation scheme in light of the revenue performance<\/strong> of GST over the past six years.<\/p>\n

Additionally, clear guidelines should be established for allocating the remaining amount of GST compensation cess collection<\/strong> to the divisible pool of taxes.<\/strong><\/p>\n

Furthermore, within the new institutional framework of federal finance<\/strong>, there should be a formal institutional relationship<\/strong> between the GST council and the Finance Commission. <\/strong><\/p>\n

The SFC should investigate how the GST Council<\/strong> can function as a Fiscal Council <\/strong>to oversee the implementation of its award during the periods when it is not actively in operation.<\/p>\n","protected":false},"excerpt":{"rendered":"

Source– The post is based on the article \u201cHaseeb Drabu writes: What the 16th Finance Commission needs to do differently\u201d published in \u201cThe Indian Express\u201d on 14th September 2023. Syllabus: GS2 – Issue pertaining to federalism. GS3- Government budgeting News– The article highlights the need for relook at federal fiscal transfer due to the introduction… Continue reading Haseeb Drabu writes: What the 16th Finance Commission needs to do differently<\/span><\/a><\/p>\n","protected":false},"author":10320,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[212,216,10500,239],"class_list":["post-260026","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-2","tag-gs-paper-3","tag-indian-express","tag-international-relations","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/260026","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10320"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=260026"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/260026\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=260026"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=260026"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=260026"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}