Budgeting for India’s tax revenues
The 14th Finance Commission headed by former Reserve Bank of India governor YV Reddy is expected to submit its report by October this year. HT explains the finance commission’s mandate and role in India’s macro-economic management:
32% share for the states in central revenues.
For the states, how important is the role of the commission for the management of their finances?
It is the duty of the Finance
Commission to make recommendations on the distribution of net tax revenues between the Centre and States and also the respective shares of the states.
The Finance Commission is also mandated to recommend measures to govern the grants-in-aid of the revenues of the states out of the consolidated fund of India (CFI).
Besides, it recommends measures needed to augment the consolidated fund of a State to supplement the resources of the Panchayats and municipalities in the state on the basis of the recommendations made by the respective state Finance Commissions.
Who appoints the finance commission and what are the qualifications for members?
The Finance Commission, headed by a chairman and has four other members, is appointed by the President under Article 280 of the Constitution. As per the provisions contained in the Finance Commission (Miscellaneous Provisions) Act, 1951 and The Finance Commission (Salaries & Allowances) Rules, 1951, the chairman of the commission is selected from among persons experienced in public affairs.
How are the other members selected?
The four other members are selected from among persons who are, or have been, or are qualified to be appointed as Judges of a High Court; have special knowledge of the finances and accounts of government; have had wide experience in financial matters and in administration; have special knowledge of economics
How are the recommendations of Finance Commission implemented?
The recommendations relating to distribution of central taxes and grants-in-aid are implemented by an order of the President.
Other recommendations relating to sharing of profit petroleum, debt relief and other central assistances are implemented by an executive order.
Is the Finance Commission unique to India?
Most federal systems resolve the fiscal imbalances using mechanisms similar to the finance commission. For example, Australia and Canada have a finance commission
What is the mandate of the 14th Finance Commission?
Besides sharing of tax revenues, the commission is also charged with laying down the principles for giving out grant-in-aid to states and other local bodies for fiveyear period beginning April 1, 2015. The commission will consider potential resources of the Centre and the State for the five year period, taxation efforts and the potential of additional revenue mobilisation, resource demands from the centre, and the various requirements of states before finalising its revenue sharing formula.