The 15th Finance Commission is likely to get an extension, as the panel has to examine devolution to Union Territories of Jammu and Kashmir and Ladakh in the light of Jammu and Kashmir Reorganisation Act, 2019.
Chairman NK Singh, on the sidelines of an event in New Delhi, said the government had yet to give fresh terms of reference to the panel regarding Jammu and Kashmir and Ladakh, even after the two union territories came into being on October 31. He did not directly say that an extension would be given.
With the deadline of the panel’s report submission of November 30 fast approaching, it is becoming increasingly likely that an interim report could be submitted on or before that day, with a final report later.
Business Standard had reported that the term of the commission could be extended by six months, primarily due to uncertainty regarding how to treat any devolution of resources.
The interim report will be submitted to enable Finance Minister Nirmala Sitharaman and her bureaucrats prepare the 2020-21 Budget. This course of action has precedence in at least three commissions.
The issues 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 commission 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.
However, for this the President of India 'on the appointed day', has to make a reference to the Finance Commission for distribution of taxes to the two Union territories. The appointed day was October 31, and Singh confirmed that the new terms of reference hadn't yet been received.
Singh also spoke on issues. On the demand from states that GST compensation be extended for the entire tenure of 15th FC's award period (till 2024-25) , Singh said the central government has already committed a 14 per cent compound annual growth rate in compensation for the states' revenue shortfall and would cover the first two years of the Commission's award period.
"We have factored this in the projections which we have made. The states have to improve their tax buoyancy for the balance three years not covered under the guaranteed 14 per cent rate," he said.
Expressing concern over the low tax buoyancy, he said the finance ministry has announced major initiatives including changes in GST and improving compliance which will have multiplier effect.
"I do also believe that the medium-term impact of the fundamental change in rate of corporate taxes in the long run will make India an important and more competitive investment destination," he said.
Singh also said that in some ways tax reforms are even more challenging today. The goods and services tax (GST) and direct tax need to be simplified so that tax-to-gross domestic product ratio improves, he added.