The 15th Finance Commission (FC-XV) was constituted by the President of India under Article 280 of the Constitution on 27 November 2017 to make recommendations on centre-state financial relations for a period of five years commencing 1 April 2020.
The 15th Finance Commission (Chairman: Mr N. K. Singh) was required to submit two reports. The first report, consisting of recommendations for the financial year 2020-21, was tabled in Parliament on February 1, 2020. The final report with recommendations for the 2021-26 period will be submitted by October 30, 2020.
15th Finance Commission
Recommendations in the Report for FY 2020-21:
Devolution of Taxes to States:
1. The share of states in the centre’s taxes is recommended to be decreased from 42% during the 2015-2020 period to 41% for 2020-2021. The 1% decrease is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the central government.
2. It also tweaked the criteria and weights under which funds are allocated to states.
3. It assigned 15% weight to the population of a state, down from the 17.5% allocated by the 14th Finance Commission but raised the weight under demographic performance from 10% to 12.5%.
4. It has introduced new criteria, the “tax effect”, for states, with 2.5% weightage and reducing the weight for income distance from 50% to 45%.
Criteria for Devolution
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Impact of the Recommendations
1. The tax share of most southern states, including Andhra Pradesh, Kerala, and Karnataka, has come down, while the share of Bihar, Madhya Pradesh, Punjab, Maharashtra, and Gujarat has gone up.
2. 10 states have seen a reduction in their share in central tax devolution, according to the interim report and these states will need to carefully assess their revenue situation.
Final FFC Report
1. The term of the N.K. Singh-headed FFC was extended by a year in November and the panel is expected to present the final report covering financial years 2021-22 to 2025-26 by October 2020.
2. The commission deferred taking a call on the contentious defence and internal security fund proposed by the Centre in the additional ‘Terms of Reference’.
3. The report acknowledges that there is merit in ensuring a predictable and stable flow of funds for defence and internal security and this will be considered in the final report.
Some Relevant Definitions
1. Income distance:
Income distance is the distance of the state’s income from the state with the highest income.
The income of a state has been computed as average per capita GSDP during the three-year period between 2015-16 and 2017-18. States with lower per capita income would be given a higher share to maintain equity among states.
2. Demographic performance:
The Terms of Reference (ToR) of the Commission required it to use the population data of 2011 while making recommendations. Accordingly, the Commission used only 2011 population data for its recommendations.
The Demographic Performance criterion has been introduced to reward efforts made by states in controlling their population. It will be computed by using the reciprocal of the total fertility ratio of each state, scaled by 1971 population data.
States with a lower fertility ratio will be scored higher on this criterion. The total fertility ratio in a specific year is defined as the total number of children that would be born to each woman if she were to live to the end of her child-bearing years and give birth to children in alignment with the prevailing age-specific fertility rates.
3. Forest and ecology
This criterion has been arrived at by calculating the share of a dense forest of each state in the aggregate dense forest of all the states.
4. Tax effort:
This criterion has been used to reward states with higher tax collection efficiency. It has been computed as the ratio of the average per capita own tax revenue and the average per capita state GDP during the three-year period between 2014-15 and 2016-17.
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This was all from us in this blog of “Report of the 15th Finance Commission for FY 2020-21”. We will update the upcoming final report with recommendations for the 2021-26 period here in this same article. Till then stay tuned to Oliveboard.
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