Fifteenth FC may have kept devolution of divisible tax pool unchanged

The interim report is likely to be made public just before or on the day of the Budget

The Fifteenth Finance Commission is believed to have maintained status quo for now, by recommending that the devolution of the divisible tax pool to states be kept at the existing 42 per cent for 2020-21. The Commission (FC) submitted its interim report for the financial year 2020-21 to President Ram Nath Kovind on Thursday, and apprised the President of the recommendations, an official statement said.

An official confirmed that the FC had kept the devolution to states unchanged for now. This is even as it uses the extra time it has been given to navigate challenging circumstances like the economic slowdown, unrealistic fiscal and revenue targets by the centre and states, and the status of Jammu and Kashmir as compared to other union territories like Delhi and Puducherry, before the submission of its final report in October 2020.

The interim report will now be given by the President to the Finance Ministry, and will enable Finance Minister Nirmala Sitharaman and her bureaucrats to prepare the 2020-21 budget. The interim report is likely to be made public on or just before the day of the budget, when it is tabled in Parliament, another official said.

Late last month, the Cabinet had extended extension to the term of 15th FC by eleven months. The commission will submit a full report for fiscal years 2021-22 to 2025-26.

This takes the period for which the 15th FC will recommend its award to six fiscal years instead of the usual five. However, this does not fall foul of what has been mandated in the Constitution of India.

Article 280 of the Constitution states that the President shall constitute a Finance Commission at the expiration of every fifth year or at such earlier time as the President considers necessary.

Simply put, this means that while 15th FC can give recommendations for six years through two reports (2020-21 to 2025-26), when the Sixteenth Finance Commission is set up, it will consider devolution for 2025-26 to 2029-30, and not from 2026-27. This will essentially keep the award period of the 15th FC at five years, since these are just recommendations which the government accepts.

The extra time had been given to 15th FC for the new union territories of Jammu and Kashmir and Ladakh.

 The issues regarding Jammu and Kashmir and Ladakh surround the fact that while technically union territories don’t get a share of the divisible tax pool, and their resources come from the centre’s share of the divisible pool, the Jammu and Kashmir Reorganization Act mandates the 15th FC to consider the Union Territory of Jammu and Kashmir to be paid out of the divisible pool, i.e it should be treated like a state. Ladakh on the other hand, is expected to get funds out of the centre’s share, like any other Union territory.