States may get incentives for taking environment-friendly measures

The Thirteenth Finance Commission, which will be presenting its report to the President in the third week of December, is likely to suggest an incentive system for states to adopt environment-friendly measures.

The Commission’s report is to recommend on sharing of tax revenue between Centre and states for the five years from April 2010. It would have chapters on fiscal consolidation and the impact of the goods and services tax (GST). But, it appears, is not likely to make concrete recommendations on compensation to states for revenue loss due to the new tax regime.

A senior official told Business Standard the commission would suggest a system to incentivise better management of the environment. “It could be linked, for instance, with the increase in forest cover of the states. If there is an improvement by some percentage, then the states (would) get a grant from the Centre,” said an official. There could be other parameters, like biodiversity and pollution level, but it is difficult to quantify these aspects at the state level, the official added.

The panel had commissioned a study by The Energy and Research Institute (Teri) for recommending measures to curtail environment degradation without compromising on development.

The green incentive the Commission is likely to suggest will be from the Centre’s grant portion. Of the funds made available to states, 85 per cent is in the form of their share in tax revenue, while 15 per cent comprises direct grants.

On the GST, the report might not go deeply into the issue, but confine itself to making observations on the proposed structure and likely impact of GST. The details of compensation mechanism for state governments in case of revenue loss would be left to the Centre to work out. “Since the structure of GST is not yet finalised, it is difficult for the Finance Commission to make any concrete recommendations on GST,” said an official.

The report would suggest measures for fiscal correction, with targets for the terminal year of 2014-15.

“There is a view whether the commission needed to suggest on fiscal deficit, revenue deficit and debt-GDP ratio separately or should it confine to fixing the revenue deficit and a borrowing limit for the government,” said the official.

The commission was originally scheduled to give its report by October but it could not do so, since revenue projections, the main platform on which recommendations were to be made, were given by the ministry of finance only in September.

The ministry has conveyed to the commission that there would be a dip in tax revenue during the current year, with a slight recovery in 2010-11. A higher growth in revenue would come only later.