15th Finance Commission: Panchayats likely to enjoy more financial powers

The 15th Finance Commission may ignore some ToRs not mandated by the Constitution in its final devolution formula

The Fifteenth Finance Commission (15th FC), whose terms of reference are mired in controversy, is likely to play safe on some of the more contentious terms by not factoring in some of them while deciding the devolution of the divisible tax pool between the Centre and states.
 
Additionally, the 15th FC, in its report to be submitted by October 2019, is likely to propose giving more financial powers to the panchayats and urban local bodies and their greater accountability - an issue that was not mentioned in the terms of reference (ToR), Business Standard has learnt.
 
Some of the ToRs which the 15th FC may not consider in its final devolution formula include assessing states on parameters such as efforts made by them to expand and deepen the reach of the tax net under the goods and services tax (GST) regime, how well they have implemented flagship schemes of the Centre, and the states' control in incurring expenditure on populist measures or the lack of it.

 
The 15th FC is weighing options of considering the impact of GST on the Centre while working on devolution formula for states, including payment of compensation for possible loss of revenues for five years, and abolition of a number of cesses.
 
"As such, any Finance Commission is required to take up the three ToRs mandated in the Constitution. The rest can be decided upon, depending on the FC's research, discussions with the states and the Centre, and its own discretion," said a government official, who has worked with previous commissions. The ToRs mandated by the Constitution for the FC recommend the distribution of the proceeds of divisible pool of taxes between the union and the states and the allocation among states. These principles should govern the grants-in-aid of the revenues of the states out of the Consolidated Fund of India and steps needed to augment the funds of a state to supplement the resources of panchayats and urban local bodies.

 
Economists who have had detailed discussions with the members of 15th FC observe that while it will elaborate on all the ToRs in its report, it has the freedom to not pick some of the more contentious ones in its final methodology.
 
In May, seven state and Union Territories had jointly written to the President of India, Ram Nath Kovind, seeking amendments to some of the contentious ToRs. A memorandum, signed by chief ministers or finance ministers of Andhra Pradesh, Puducherry, Karnataka, Delhi, West Bengal, Kerala, and Punjab, said the terms were disruptive and cause for concern. Their biggest concern was the use of the 2011 census, which, they said, would benefit northern states which have not worked towards population control. Till the 14th Finance Commission, the 1971 census was used.

 
Prime Minister Narendra Modi last Sunday at a meeting with the governing council of the NITI Aayog, made it clear that the 2011 census should be one of the parameters for devolving funds to the states. He, however, urged states to identify parameters or indices through which performance in other fields could be rewarded so that no one felt left out.
 
In their letter to Kovind last month, the states had also urged that they should not be judged on the basis of the Narendra Modi government's 'New India 2022' development goals or on implementing central schemes, or to what extent they have deepened the GST net. They have said Union Territories with legislatures, like Delhi and Puducherry, be considered by the 15th FC.

 
Under pressure, the 15th FC had in the same month announced setting up an advisory council to look into the ToRs. The council is understood to have told the 15th FC that any loss to the states, owing to the use of the 2011 census, can be countered by rewarding states that have worked towards population control.