Fin Comm hikes states’ share of central taxes to 32%, links rewards with results

Proposes Grand Bargain On GST

The Vijay Kelkar-headed Thirteenth Finance Commission has hiked the share of the states in central taxes from the existing 30.5% to 32% while making a strong pitch for greater fiscal discipline both at the Centre and in the states. The commission also made 

a case for disinvestment and privatisation of state public sector units (PSUs), saying non-working ones should be closed down by 2011. 
    The action taken report submitted in Parliament by finance minister Pranab Mukherjee on Thursday said the government had accepted most of the major recommendations, while some others like the ones related to the goods and services tax (GST) scheme or the fiscal roadmap were accepted in principle but the modalities were yet to be worked out. 
    The commission has advocated a calibrated exit from the government stimulus package in response to the financial crisis and also suggested that proceeds of disinvestment should be made available for funding infrastructure projects. It has also recommended financial incentives for states with good performance in areas like infant mortality and administration of justice. 
    The report estimated that during 2010-2015, the states would get Rs 14.5 lakh crore as their share of central taxes and duties and another Rs 3.1 lakh crore as grants-in-aid if its recommendations were implemented. 
    The latter sum includes Rs 50,000 crore to be set aside for compensation to states for moving to GST, slated to be introduced from this April. Who'll Gain, Who'll Lose 
Share of states in central taxes increased from 30.5% to 32% 
Over 2010-2015, states will get 
Rs 14.5 lakh cr as share of central taxes and duties and Rs 3.1 lakh cr as grants-in-aid 
Rs 50,000 cr as compensation for states accepting 'grand bargain' on GST, including veto rights of Centre on any change in rates 
Rs 5,000 cr each for reducing infant mortality rates and introducing renewable energy programmes 
Rs 51,800 cr for 8 states—North-Eastern states barring Assam and Sikkim as well as Himachal Pradesh and J&K—to help bridge non-Plan revenue deficits 
Rs 5,000 cr for improved administration of justice 
Rs 3,000 cr for implementing unique identification (UID) system 
Slams Centre for raising revenues through cesses and surcharges, which do not form part of the pool to be shared with the states 
Big gainers: UP, Himachal, J&K, N-E states and Maharashtra Big losers: Southern states, Gujarat, Jharkhand, Orissa and Chhattisgarh 
Biggest deal for Maha 
Mumbai: The 13th Finance Commission has sanctioned Rs 91,709 crore for Maharashtra for 2010-2015, an increase of around Rs 54,795 crore from the previous five-year period, reports Prafulla Marpakwar. It is probably the best deal the state has got so far from the finance commissions. P 2 WAY TO GO'Govt should have no revenue deficits by FY14' 
    It also includes Rs 5,000 crore each for reducing infant mortality rates (IMR) and introducing renewable energy programmes. 
    Also part of the tranche is a sum of Rs 51,800 crore set aside for eight states — the North-Eastern states, barring Assam and Sikkim, and HP and J&K — as a grant to help them bridge their non-Plan revenue deficits. 
    Like the grants for reducing IMR and for introducing renewable energy, there are others linked to outcomes. One of these is a Rs 5,000 crore grant for improved administration of justice and one of Rs 2,989 crore for implementing the unique identification (UID) system. 
    Local bodies like panchayats and municipalities are to get an estimated Rs 87,519 crore over the next five years, which would be around 2.3% of the divisible pool of central taxes. The commission has also said states should share royalty income derived from things like minerals with the local bodies in whose jurisdiction the income arises. 
    The changes made by the commission in the formula for sharing this pool among the states are likely to leave some states crying foul that they have been short-changed while others quietly celebrate a windfall. 
    In its indicated roadmap for fiscal correction, the commission recommended that the Centre should have no revenue deficits by 2013-14 and its fiscal deficit should be less than 3% of GDP. As for the states, they would have to meet the same targets in a staggered manner depending on their current deficit levels with the last of them meeting a 2014-15 deadline. The total debt of the Centre and states should also come down to 68% or less of GDP by 2014-15. 
    Recognising that Pay Commission awards have had serious adverse implications for state governments in particular, the finance commission suggested that in future, recommendations of pay panels should not be made retrospectively effective. Instead, they should take effect only after they have been accepted by the government. 
    A recommendation made in this context that could have a far reaching impact on senior citizens in particular is that the small savings schemes should have market-linked interest rates to reduce the distortions the current higher rates introduce. 
    On the move to GST, the commission said that states should be offered a grand bargain, and only those states that accept it should get compensation from the Rs 50,000 crore fund for that purpose. The bargain would include a binding agreement between the states and the Centre that would allow the latter veto powers on any changes in the rates. 
    The report came down on the Centre for its practice of raising a substantial chunk of revenues through cesses and surcharges, which do not form part of the pool to be shared with the states. In fact, this is cited as one of the reasons for enhancing the states' share in the divisible pool. 
    It also criticised the Centre for tax exemptions which not only lead to sizable revenue foregone, but also skew the benefits in favour of certain states because some of them are areabased exemptions. It pointed out that the revenue foregone due to tax exemptions was of the order of Rs 4.2 lakh crore in 2008-09, by the government's own admission. 
    Another bone of contention between the commission and the finance ministry was that according to its calculations, the Centre was actually not giving the states the 30.5% share they were supposed to be getting under the 12th Finance Commission's recommendations. It said the Centre had explained that its accounts do not entirely reflect the true position and that in fact it was passing on 30.5% to the states. The commission said if this was the case, the Centre should ensure greater transparency in its accounting. 
    The commission also suggested that it would be better to move away from centrally-sponsored schemes to formula-based sharing with the states to preclude the possibility of the regional dispersion of the funds going askew for such schemes. 
    The practice of moving several major liabilities like the oil and fertilizer bonds off-budget also came in for sharp criticism on the grounds of lack of transparency.