15th FC submits report to President, keeps tax devolution to states at 41%

Report, submitted on Monday, addresses fears of southern states on population criteria

The 15th Finance Commission (FC) has recommended that the states be given 41 per cent of the divisible tax pool of the Centre during the period 2021-22 to 2025-26, sources said.

The 15th FC, led by former revenue secretary and parliamentarian N K Singh, submitted its final report to President Ram Nath Kovind on Monday.  It had also recommended the same percentage of devolution in its interim report for 2020-21.

The 14th FC had recommended 42 per cent tax devolution to the states. This was 10 percentage points higher than what was suggested by the previous FC.

The 15th FC recommended 41 per cent devolution to accommodate the funds for Jammu and Kashmir and Ladakh, which were carved out as Union Territories by Parliament last year.

While the 14th FC recommended transferring 42 per cent for the period 2015-16 to 2019-20, the percentage transferred has been much less if cess and surcharges are also included. Cess and surcharges do not form part of the divisible tax pool and the Centre is using these two heads to garner resources in recent years.

For instance, the Centre was projected to collect Rs 21.6 trillion in 2019-20 (revised estimates) but the states’ share was pegged at just Rs 6.6 trillion, which constituted 30.5 per cent of the overall tax mop-up.

The Budget estimates for FY21 do not hold good any longer due to lockdowns. Even then only 32.2 per cent of Central tax collection, including cess and surcharges, was estimated to go to the states. This may come down further because the Centre hiked taxes on petrol and diesel in the form of cess and special additional duty in May, which is estimated to add another Rs 1-1.5 trillion to the exchequer. Southern states had earlier expressed fears that their funds would be curtailed since the terms of reference talked about using the population data of 2011 while making recommendations.

Those states had controlled populations more efficiently than the other parts of the country and any weighting given to population may be disadvantageous to them.The Commission did give a 15 per cent weighting to population, but, to ensure that the states controlling population may not be at the receiving end, also came up with the criteria of demographic performance, sources said. This has been introduced to reward efforts made by states in controlling their population, they added.

It is computed by using the reciprocal of the total fertility ratio of each state, scaled by the 1971 population data. States with a lower fertility ratio will score higher on this criterion. The total fertility ratio in a particular year is defined as the number of children born to each woman if she were to live to the end of her child-bearing years and give birth to children in alignment with the prevailing age-specific fertility rates.

The 15th FC has recommended giving incentives to states that implement agricultural marketing reforms and improve the health sector. It was asked to give its recommendations on unique and wide-ranging issues in its terms of reference.

Apart from vertical and horizontal tax devolution, local government grants, disaster management grants, the FC was asked to examine and recommend performance incentives for the states in many areas like power, adopting the direct benefit transfer (DBT) mechanism, and solid waste management. It was asked to examine whether a separate mechanism for funding defence and internal security ought to be set up and, if so, how such a mechanism could be operationalised. The FC has sought to address all its terms of reference in the report, said an official statement.