13th Finance Comission

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Anirudh Burman

[email protected]

March 9, 2010

Report SummaryReport of the Thirteenth Finance Commission: 2010 2015

Background

The Finance Commission is constituted by the President

under Article 280 of the Constitution. Its main work is

to give recommendations on distribution of central tax

revenues between the Union and the States. The

Thirteenth Finance Commission submitted its report in

Parliament on February 25, 2010.

Terms of Reference

The Commission was asked to make recommendations

on the following matters:

The distribution of taxes collected between the centreand the states. The principles determining the grants-in-aid to states

out of the Consolidated Fund of India and the sums to

be paid to states.

The measures needed to augment the ConsolidatedFund of a state to supplement the resources of

Panchayats and Municipalities.

To review the state of the finances of the centre andthe states in light of the operation of the States Debt

Consolidation and Relief Facility which was

introduced on the basis of the recommendations of the

previous Finance Commission.

To review the present arrangements regardingfinancing of disaster management.

To suggest a new roadmap for fiscal consolidation inthe period between 2010 2015.

Findings and Recommendations

Sharing of Union tax revenues

The share of states in net proceeds of shareable centraltaxes shall be 32 per cent in each of the financial years

from 2010-11 to 2014-15.

The share of each state in the proceeds of all shareablecentral taxes in each of the financial years from 2010-

11 to 2014-15 shall be as specified (Annexure I).

Finances of Union and States1.Actual share in the tax revenue of the Centre which is

devolved to states: The Eleventh and Twelfth

Commissions had recommended that the share of

states be fixed at 29.5% and 30.5% respectively, of

central taxes.

However, the actual shares devolved to states have

been lower than recommended by previous finance

commissions. The government has explained that

when cesses and surcharges are taken into account, the

release to states is in keeping with the

recommendations.

Recommendation: The Ministry of Finance should

ensure that the accounts reflect all collections so that

there are no inconsistencies in the amounts released to

states.

2.Losses in the power sector: Subsidy for the powersector is the largest component of state government

subsidies. The power sector in most states is beset

with high losses, and inefficient infrastructure,

resulting in huge losses.

Recommendation: Losses in the power sector areexpected to be a major drag on the finances of State

Governments, and therefore, the problems confronting

this sector need to be addressed in a time-bound

manner.

3.Reduction of centrally sponsored schemes: Initiativesshould be taken to reduce the number of Centrally

Sponsored Schemes and to restore the predominance

of fund-transfers based on Planning Commission

recommendations.

Goods and Services Tax (GST)

The Commission has recommended the adoption of the

GST and formulated a model GST. The main features ofthe model GST are:

The central portion of the GST would include (a)central excise duties, (b) service tax, (c) additional

customs duties, (d) all surcharges and cesses.

The state GST would include (a) VAT, (b) centralsales tax, (c) cesses and surcharges, and others such as

luxury tax, lottery tax, stamp duties, etc.

There would be special provisions for certain goodssuch as petroleum, and exemptions would be allowed

only on the basis of a common list applicable to all

states and the centre.

GST should be implemented by all states and thecentre at the same time.

To provide incentives to states to agree to the model

GST, the Commission has recommended the

implementation of a Grand Bargain. The Grand Bargain

envisages a grant of a total of Rs. 50,000 crore to be

provided to all states. This amount would be distributed

among states subject to the model GST framework being

adopted by all states. This grant would be used to

compensate states for revenue losses on account of


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implementing GST. This amount should not be

distributed if states cannot reach a consensus on

implementing GST.

The Empowered Committee of State Finance Ministers

(EC) should be given statutory status. The compensation

should be disbursed in quarterly instalments on the basis

of recommendations by a three-member CompensationCommittee. The Compensation Committee should

comprise of the Secretary, Department of Revenue of the

central government, Secretary to the EC, and an eminent

person with experience in public finance.

Union Finances

The central government has recently decided that

proceeds from disinvestment shall be used fully as

capital expenditure for social sector programmes. This

policy needs to be liberalised and proceeds should also

be used for augmenting critical infrastructure and

environment related projects.

State Finances The practice of diverting plan assistance to meet non-

plan needs of special category states should be

discontinued.

For PSUs:All accounts, and backlogs of PSU accounts should

be cleared by states.

States need to draw a roadmap for closure of non-working PSUs by March 2011. Divestment and

privatisation of PSUs should be considered and

actively pursued.

Power Sector:Reduction of Transmission and Distribution (T&D)losses should be attempted.Unbundling needs to be carried out on priority basis

and open access to transmission strengthened.

Proper systems should be put in place to avoiddelays in completion of hydro projects.

Regulatory institutions should be strengthenedthrough capacity building, consumer education and

tariff reforms.

Regarding reforms in the area of pensions, a switch tothe New Pension Scheme needs to be completed at the

earliest.

Revised roadmap for fiscal consolidation

Central governmentThe revenue deficit of the Centre needs to be

progressively reduced and eliminated, followed by

emergence of a revenue surplus by 2014-15.

A target of 68 percent of GDP for the combineddebt of the centre and states should be achieved by

2014-15.

The Medium Term Fiscal Plan should be reformedand made a statement of commitment rather than a

statement of intent.

A number of disclosures including detailed break-upof grants to states, systematised statement on tax

expenditure, compliance costs of major tax

proposals, fiscal impact of major policy changes,

should be made with the annual budget.The government should list all public sector

enterprises that yield a lower rate of return on assets

than a norm which should be decided by an expert

committee.

An independent review mechanism should be set-up by the Centre to evaluate its fiscal reform

process.

State governments:States should be able to get back to the path of fiscal

consolidation after the disruption caused in 2008-09,

and 2009-10. States with zero revenue deficit or

revenue surplus in 2007-08 should eliminaterevenue deficit by 2011-12. Other states should do

so by 2014-15.

General category states with zero revenue deficit in2007-08 should achieve a fiscal deficit of 3 percent

of GDP by 2011-12. Other states should do so by

2013-14.

States should amend/enact Fiscal Responsibility andBudget Management Acts to build on the fiscal

reform path worked out.

State-specific grants recommended for a stateshould be released upon compliance.

Borrowing limits for states to be worked out byFinance Ministry using the fiscal reform path, thusacting as an enforcement mechanism for fiscal

correction by states.

Loans from the central government to states andadministered by ministries/departments other than

Ministry of Finance, outstanding as at the end of

2009-10, should be written off.

Local Bodies

Local bodies should be transferred 2.28% of thedivisible pool of taxes (over and above the share of the

states), after converting this share to grant-in-aid under

Article 275. This amount adds up to Rs 87519 crores.

Article 280 (3) (bb) & (c) of the Constitution shouldbe amended to make the recommendations of the StateFinance Commissions less binding on state

governments.

Article 243(I) of the Constitution should be amendedto empower states governments to constitute and direct

state Finance Commissions to give their report before

the National Finance Commission finalises its report.

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State governments should strengthen their local auditdepartments through capacity building.

Bodies similar to the SFC should be set up in stateswhich are not covered by Part IX of the Constitution

(Panchayats).

Local Bodies should be associated with city planningfunctions wherever other development authorities aremandated for this function.

State governments will be eligible for the generalperformance grant and the special areas performance

grant only if they comply with the prescribed

stipulations.

Disaster Relief

Assistance of Rs 250 crore to be given to the NationalDisaster Response Force (NDRF) to maintain an

inventory of items required for immediate relief.

Provisions relating to the District Disaster ResponseFund in the Disaster Management Act may bereviewed and setting up of these funds left to the

discretion of the individual states.

The list of disasters to be covered under the schemefinanced through FC grants should remain as it exists.

However, man-made disasters of high-intensity may

be considered for NDRF funding.

Grants-in-aid to States

Non-Plan Revenue Deficit: Eight special categorystates (Arunachal Pradesh, Himachal Pradesh, Jammu

and Kashmir, Manipur, Meghalaya, Mizoram,

Nagaland, Tripura) have non-plan revenue deficits.

For these states grant of Rs 51,800 crore isrecommended.

Elementary Education: A grant of Rs 24,068 crore isrecommended for elementary education over the

award period. The education grant will be additional

to the normal expenditure of the states for elementary

education.

Environment:An amount of Rs 5000 crore is recommended as

forest grant for the award period.

Twenty five per cent of the grants in the last threeyears are for preservation of forest wealth.

An incentive grant of Rs 5000 crore isrecommended for developing grid-connected

renewable energy based on the states achievement

in renewable energy capacity addition from 1 April

2010 to 31 March 2014.

An amount of Rs 5000 crore is recommended aswater sector management grant for four years.

Improving OutcomesStates should be incentivised to enroll residents who

participate in welfare schemes within the Unique

Identification (UID) programme. A grant of Rs 2989

crore is proposed to be given to State Governments.

A grant of Rs 5000 crore is recommended forreducing their Infant Mortality Rates.

A grant of Rs 5000 crore is proposed to supportimprovement in a number of facets in the

administration of justice.

A grant of Rs 10 crore will be provided to eachgeneral category state and Rs. 5 crore to each

special category state to set up an employees and

pensioners data base.

Maintenance of Roads and BridgesAn amount of Rs 19,930 crore has been recommended as

grant for maintenance of roads and bridges for four

years. This is additional to the normal expenditure

incurred by states.

State-specific needsA total grant of Rs 27,945 crore is recommended for

state-specific needs. Release of this grant andexpenditure will be subject to certain conditions.

DISCLAIMER: This document is being furnished to you for your

information and exclusive use only. The opinions expressed herein are

entirely those of the author(s). PRS Legislative Research (PRS)makes every effort to use reliable and comprehensive information, but

PRS does not represent that the contents of the report are accurate orcomplete. This document has been prepared without regard to the

objectives or opinions of those who may receive it.


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ANNEXURE I

12th

Finance Commission 13th

Finance Commission

State Share of total taxes

(Percentage)

Amount in 2009-

10 (Rs in crores)

Share of total taxes (In

percentage, excluding

Service Tax)

Share (In

percentage, of

Service Tax)

Amou

11 (R

Andhra Pradesh 7.356 12109 6.937 7.047

Arunachal Pradesh 0.288 474 0.328 0.332

Assam 3.235 5325 3.628 3.685

Bihar 11.028 18154 10.917 11.089

Chhattisgarh 2.654 4369 2.470 2.509

Goa 0.259 426 0.266 0.270

Gujarat 3.569 5875 3.041 3.089

Haryana 1.075 1770 1.048 1.064

Himachal Pradesh 0.522 859 0.781 0.793

Jammu & Kashmir 1.297 1880 1.551 nil

Jharkhand 3.361 5533 2.802 2.846

Karnataka 4.459 7340 4.328 4.397

Kerala 2.665 4387 2.341 2.378

MadhyaPradesh 6.711 11047 7.120 7.232

Maharashtra 4.997 8226 5.199 5.281

Manipur 0.362 596 0.451 0.458

Meghalaya 0.371 611 0.408 0.415

Mizoram 0.239 393 0.269 0.273

Nagaland 0.263 433 0.314 0.318

Orissa 5.161 8496 4.779 4.855

Punjab 1.299 2138 1.389 1.411

Rajasthan 5.609 9233 5.853 5.945

Sikkim 0.227 374 0.239 0.243

TamilNadu 5.305 8733 4.969 5.047

Tripura 0.428 704 0.511 0.519

Uttar Pradesh 19.264 31712 19.677 19.987

Uttarakhand 0.939 1546 1.120 1.138

West Bengal 7.057 11617 7.264 7.379

All States 100.000 164362 100 100

Comparison of shares of states in the Twelfth and Thirteenth Finance Commission Reports


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ANNEXURE II

Grants in aid made to states as per the recommendations of the Thirteenth Finance Commission

Grants in Aid to States

(Rs crores)

I Local Bodies 87519

II Disaster Relief (including capacitybuilding)

26373

III Post-devolution Non-plan Revenue

Deficit

51800

IV Performance Incentive 1500

V Elementary Education 24068

VI Environment 15000

(a) Protection of Forests 5000

(b) Renewable Energy 5000

(c) Water Sector Management 5000

VII Improving Outcomes 14446

(a) Reduction in Infant Mortality Rates 5000

(b) Improvement in Supply of Justice 5000

(c) Incentive for Issuing UIDs 2989

(d) District Innovation Fund 616

(e) Improvement of Statistical Systems atState and District Level

616

(f) Employee and Pension Data base 225

VIII Maintenance of Roads and Bridges 19930

IX State-specific 27945

X Implementation of model GST 50000

Total 318581

Source: Report of the Thirteenth Finance Commission; PRS.

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