Budget 2020: Fifteenth Finance Commission Retains Devolution Formula With Some Adjustments

Budget 2020: Fifteenth Finance Commission Retains Devolution Formula With Some Adjustments

The Fifteenth Finance Commission, in its interim recommendations, has suggested continuing with a 42 percent devolution of divisible taxes to states. It has, however, recommended some adjustments, including a carve out for Jammu and Kashmir and Ladakh.

The interim recommendations were released as part of the budget presentation on Saturday and will form the basis on centre-state fiscal relations in 2020-21. Final recommendations of the commission will be submitted by Oct. 30, 2020.

  • The Fifteenth Finance Commission has recommended keeping the split of net proceeds of union government’s taxes unchanged at 42 percent, post adjusting 1 percentage point for needs of two union territories of J&K and Ladakh.
  • The commission has recommended an allocation of Rs 28,983 crore for disaster risk management in 2020-21, in addition to disaster response funds through setting up of mitigation funds at both state and national level.
  • The Finance Commission has not yet set aside funds separately for defence spending needs. It said that a special committee will be set up to examine the same.

How They Compare With Fourteenth Finance Commission

The Fourteenth Finance Commission had recommended a sharp increase in devolution of taxes to states. This had been done while reducing grants received by states.

Following the Fourteenth Finance Commission, the share of states in net proceeds of tax revenues rose to 42 percent from 32 percent earlier. This, however, accompanied a compositional shift, which included higher guaranteed devolution but lower grants.

The commission had justified this by arguing that states need greater flexibility. The increased share of cess and surcharge in tax collections, which are not part of the divisible pool of taxes, was also a factor in the Fourteenth Finance Commission’s recommendations.

While the centre accepted the suggestions, it did so reluctantly and argued that the higher devolution to states was putting pressure on central finances.

As such the Fifteenth Finance Commission was asked to re-look at the devolution formula. It was also asked to look at the feasibility of setting up a separate fund for defence and internal security, which would be funded outside the divisible pool. States had opposed both those terms of reference.