15th Finance Commission Report

Finance Commission and decreasing Share of states in central taxes

15th Finance Commission Report:

15^th Finance Commission was headed by Mr. N. K. Singh –the commission's chairman, other members being,

The 15^th Finance Commission was required to submit two reports.

The first report, consisting of recommendations for the financial year 2020-21, was tabled in Parliament in February 2020.
The final report with recommendations for the 2021-26 period was tabled in Parliament on February 1, 2021.

15th Finance Commission Report:

Share of states in central taxes

The share of states in the central taxes for the 2021-26 period is recommended to be 41%, same as that for 2020-21.
This is less than the 42% share recommended by the 14^thFinance Commission for 2015-20 period. The adjustment of 1% is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the centre.
Divisible Pool - The divisible pool is that portion of gross tax revenue which is distributed between the Centre and the States. The divisible pool consists of all taxes, except surcharges and cess levied for specific purpose, net of collection charges.
Share of cess & surcharges has increased from over 10% in 2011-12 to around 25% in 2022-23.
Cess and surcharges are part of central taxes but not part of the divisible tax pool and do not have to be shared with States.
Therefore effective devolution is less than 31% of total tax revenues of centre.

15th Finance Commission Report:

Criteria for devolution

The criteria used by the Commission to determine each state’s share in central taxes, and the weight assigned to each criterion. Table

1 : Criteria for devolution

Income distance: Income distance is the distance of a state’s income from the state with the highest income. Income of a state has been computed as average per capita GSDP during the three-year period between 2016-17 and 2018-19. A state with lower per capita income will have a higher share to maintain equity among states.

Demographic performance: The Terms of Reference of the Commission required it to use the population data of 2011 while making recommendations. Accordingly, the Commission used 2011 population data for its recommendations. The demographic performance criterion has been used to reward efforts made by states in controlling their population. States with a lower fertility ratio will be scored higher on this criterion.

Forest and ecology: This criterion has been arrived at by calculating the share of the dense forest of each state in the total dense forest of all the states.

Tax and fiscal efforts: This criterion has been used to reward states with higher tax collection efficiency. It is measured as the ratio of the average per capita own tax revenue and the average per capita state GDP during the three years between 2016-17 and 2018-19.

Fiscal roadmap

Fiscal deficit and debt levels: The Commission suggested that the centre bring down fiscal deficit to 4% of GDP by 2025-26. For states, it recommended the fiscal deficit limit (as % of GSDP) of: (i) 4% in 2021-22, (ii) 3.5% in 2022-23, and (iii) 3% during 2023-26. If a state is unable to fully utilise the sanctioned borrowing limit as specified above during the first four years (2021-25), it can avail the un-utilised borrowing amount (calculated in rupees) in subsequent years (within the 2021-26 period).

Individual share of states in the taxes devolved by the centre (out of 100)