The Finance Commission (FC) should not be tied down with an expansive Terms of Reference (ToR) which restricts its degrees of freedom, Kerala Chief Minister Pinarayi Vijayan said.
FCs have an important mandate to recommend how taxes are to be distributed among States. This is an act of delicate balancing when levels of per capita income and development indicators vary widely across States, Vijayan said while inaugurating a conclave of Finance Ministers from Opposition-ruled States as the 16th FC tours States to learn about their demands and grievances.
Myriad fiscal challenges
The Chief Minister said the conclave is taking place “when our federal polity is facing several challenges and many States have been compelled to take legal course of action to enforce constitutional rights. I earnestly hope that this conclave will be a landmark event which will make meaningful suggestions to strengthen the fiscal federal setup of our nation.”
Among those attending the one-day conclave are Mallu Bhatti Vikaramarka, Deputy Chief Minister and Finance Minister, Telangana; Thangam Thennarasu, Finance Minister, Tamil Nadu; Krishna Byre Gowda, Revenue Minister, Karnataka; Krishna Harpal Singh Cheema, Finance Minister, Punjab; apart from KN Balagopal, host Finance Minister, Kerala. A number of leading economists and analysts are addressing the event.
Surcharge and cess
Article 270 of the Constitution excludes surcharges and cess from the divisible pool of taxes shareable with States, Vijayan said. In the last decade, surcharges and cess have shown a rising trend and now comprise around a fifth of gross tax revenue of the Union. Its direct consequence is shrinkage of divisible pool. “No observer can omit to take note of the fact that the rise in share of surcharges and cess have happened at a time when FCs from the 14th have recommended a higher share of the net proceeds collected by the Union.”
Vijayan recalled Kerala had demanded in a memorandum to the 15th FC the preceding share of taxes distributed need be raised to 50 per cent considering vertical fiscal imbalance between taxing powers and expenditure obligations of the Union and States. Other States too have made this demand, as can be seen from the Report of the 12th Finance Commission.
Continued relevance
“Demand for a higher share for States has continued relevance and it is my request to eminent scholars and colleagues here to formulate this in a concrete manner. This will help States make an effective case before the 16th FC for raising share of taxes distributed to the States,” Vijayan added. Distribution among States also needs due consideration. The 16th FC has the task of delicately balancing interests of States which have a low per capita income and a larger share of population and others which have achieved aims of the National Population Policy, 1976.
Key distribution formula
While taking care of interests of the former, the latter cannot be made to face continuously falling tax shares. “To cite the example of Kerala, our share in taxes has fallen from 3.05 per cent in the 11th FC to 1.92 per cent in the 15th. Due consideration has to be given to needs of States which have taken extra efforts to achieve health, education and demographic indicators.”
The 16th FC will have to carefully decide on a distribution formula and put to use effectively constitutional provisions of Article 275 for disbursing grants to states-in-need. “States and local governments should be able to discharge their functions in subjects constitutionally allotted to them in a manner that allows flexibility, by taking care of jurisdictional peculiarities while keeping in mind national priorities. They should get funds which do not come with conditionalities,” the Chief Minister said.
Guidance from past efforts
Efforts in the past by States have been catalysts in highlighting problems in Centre-State relations and initiatives for changes. Vijayan referred to PV Rajamannar Committee appointed by government of late M Karunanidhi in Tamil Nadu; a memorandum submitted by the Left Front Government in West Bengal led by late Jyoti Basu in 1977; demands raised in a conclave of Chief Ministers in 1983 that resulted in the appointment of Justice Sarkaria Commission; and a conclave held in Kerala in 2017 demanding reconsideration of certain items in the ToR of the 15th Finance Commission.