Recommendations of the 15th Finance Commission

Recommendations of the 15th Finance Commission

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If the reports of therecent Finance Commission in India are anything to go by then it becomes amply clear that the commission has been quite fair in defining the financial relations and distribution of taxes between the Center and states. The fifteenth Finance Commission was constituted on 27 November 2017 and its deliberation period is from the end of 2017 till the end of October 2019. The commission is headed by N. K. Singh and its recommendations will be applicable for the period from 2021-26.

The 15th Finance Commission allocation has been done in a way so that all concerns regarding the horizontal and vertical devolution could be analyzed and distributed in a win-win format for the Center and the states. It has been set up at a time when massive reforms have been taken up to achieve fiscal federalism. Reforms like the implementation of GST (Goods and Services Tax), abolition of planned and non-planned expenditure and replacement of the Planning Commission with the Niti Aayog have also happened during this period.

Thus, the recommendations of the latest Finance Commission in India which were tabled on 1st February 2021 mainly dwell on vertical and horizontal devolution, Gross Tax revenue, GST, Revenue Deficit Grants (RDG), local governments and health. It has been suggested to maintain the vertical devolution at 41% or the same rate that was mentioned in the report of 2020-21 to stabilise the resources and help maintain predictability during the uncertain pandemic time. For horizontal devolution, the criteria and weights are 15% for population, 15% for area, 10% for forest and ecology, 45% for income distance, 2.5% for tax and fiscal efforts and 12.5% for demographic performance. There is a drop of 1.7% in the gross tax revenue as compared to 2016-17 figures and this drop is evident in the tax devolution to the states.

The Finance Commission 15 report also discussed GST and mentions that it accounts for 35% of the total tax revenue of the country and 44% of the own tax revenue of states. The commission has recommended a total RDG of about 2.94 Crore for 17 states towards the award period. The report has also suggested increasing the union health expenditure by 8% by the year 2022 and prioritizing the creation of All India Health Services on the lines of UPSC Civil Services.