There should be clear terms on how the GST Council and the Finance Commission will work together, said N K Singh, chairman of the Fifteenth Finance Commission, on Monday in a speech on challenges facing fiscal federalism.
Finance commissions recommend devolution of revenues, but GST tax rates, exemptions, changes, and implementation are entirely within the domain of the GST Council. This may lead to questions about who has the authority to monitor, scrutinise and evaluate the best outcomes.
"Since both are constitutional bodies, a working relationship between the GST Council and the Finance Commission deserves closer consideration," said Singh, while delivering the fifth G Ramachandran Memorial Lecture in memory of the former civil servant.
Finance Commissions change every five years and people remember only two recommendations they make: revenue to be shared between the Centre and states and then on horizontal devolution in respect of states.
"But Finance Commissions have had a rich legacy and invariably suggested far-reaching structural reforms. These lie buried as part of legacy historical record. They await a possible resurrection for the next version of the Finance Commission. There is no continuity much less obligation in any manner to seriously examine much less implement many other important recommendations which are made by the successive Commission," said Singh.
A permanent secretariat for the revenue commission can be a repository of research, domain knowledge and oversight.
Singh wanted the inter-state Council to be restructured and made part of the Prime Minister Office.
Another challenge is that when the Fifteenth Finance Commission was appointed, there has been other significant changes in India’s fiscal framework. The Planning Commission which had overarching power on overseeing and monitoring development of states was abolished and it has been replaced by NITI Aayog whose functions are not connected with the financial devolution. The distinction between plan- and non-plan expenditure has also been removed from the Union budget and the transitional arrangements are still under evolution.
There are also challenges in terms of conditional transfer of funds, especially when it is output based conditionality.
"Similarly, the calibration of Revenue Deficit can vary throwing up multiple choices both on the timeframe and the quantum. The endeavour is to bridge the revenue deficit grant of the state to the extent possible," he said.
Desirability of Revenue Deficit Grants needs to be addressed, with the terms of reference of the Fifteenth Finance Commission is to examine whether the difference between the revenue and expenditure of the State should be given at all, in line with the Fiscal Responsibility and Budget Management Act, 2003 recommendation that States should maintain a revenue decidit of zero within the stipulated timeframe.