General Studies (Paper - 3) : Model Question & Answers

Question: Discuss the important changes brought in by the Finance Commission in determining tax transfers to the States. Do you think these changes are justified?

Answer: Some important changes brought in by the fourteenth finance commission (FFC):

(i) The FFC has increased the share of the states in the central divisible pool from the current 32 percent to 42 per cent.

(ii) The FFC has proposed a new horizontal formula for the distribution of the states’ share in divisible pool among the states. Relative to the Thirteenth Finance Commission, the FFC has incorporated two new variables: 2011 population and forest cover; and excluded the fiscal discipline variable.

(iii) Other types of transfers have been proposed including grants to rural and urban local bodies, a performance grant along with grants for disaster relief and revenue deficit. While these changes have made states better off and is claimed to be a move towards fiscal federalism, some concerns remain, particularly after the Budget 2015-16 and following steps.

For instance, following the budget, the central government has introduced a number of cess and surcharges for enhancing their own revenue to the detriment of the states. e.g. 5-12% of surcharge on domestic companies, 2% Swachh Bharat Cess on all services, increase in clean energy cess. Further, certain taxes have been shifted from states to centre e.g. conversion of excise duty on petrol and diesel in to road cess to centre, abolition of wealth tax and 2% surcharge on income tax in lieu of this. When these looses to states are accounted for, it will dilute the actual benefits that has been claimed FFC.