[op-ed snap] New India formula?

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Mains Paper 2: Polity | Appointment to various Constitutional posts, powers, functions and responsibilities of various Constitutional Bodies

From UPSC perspective, the following things are important:

Prelims level: Particular of the Finance Commission, Click2read

Mains level: Challenges and functions related to the 15th Finance Commission, discussed in the newscard


Particulars of the 15th Finance Commission

  1.  The constitutional body is tasked with recommending a fiscal road map and a sharing of resources between the Centre and the States
  2. The Commission has less than two years to complete its deliberations and submit its report by October 2019
  3. It will give the government a little over a quarter to consider and implement its recommendations for the period from April 2020 to March 2025

Government’s request to the Finance Commission

  1. The Centre has urged the Commission to finalise its tax-devolution formula after factoring in the impact on the Union’s fiscal situation
    (keeping in mind “the continuing imperative of the national development programme including New India – 2022”)
  2. Taken together with its need for resources for essential spending in areas such as defence, security, infrastructure and climate change, the Centre seems to be seeking a rollback of the 42% share for States

Possible effects of reduction in share of States

  1. The government’s top brass has repeatedly asserted the need for revenue to maintain public spending in the face of flak for high petroleum taxes
  2. But a reduction from the 42% rate could dent States’ faith in the Centre’s claims of cooperative federalism

The Commission and the GST

  1. The rollout of the goods and services tax, which marks a new chapter in tax administration with both the Centre and States working together through the GST Council, makes the challenge trickier
  2. The Centre is committed to compensating States for any revenue losses arising out of GST implementation till June 2022
  3. Thus covering nearly half the period for which the Commission is to recommend a formula

Mandate of the Commission

  1. Its mandate includes formulating performance-linked incentives for States on a range of desirable outcomes such as
    (i) attaining a replacement rate in population growth,
    (ii) deepening the GST net and
    (iii) improving the ease of doing business
  2. Devising a fiscal nudge for development goals sounds attractive
  3. Though the challenge would lie in quantifying the good from the ugly — especially when one has to reward a State for showing ‘control or lack of it in incurring expenditure on populist measures’