15th Finance Commission meets tomorrow; to decide how much tax must Modi govt share with states : 04-09-2020

The fifteenth finance commission is set to meet the Economic Advisory Council on Friday, amid a major contraction in the Indian economy. GDP growth, tax buoyancy of the centre and the states, GST compensation, revenue deficit grant, and fiscal consolidation are the matters to be discussed at the meeting. As the coronavirus pandemic hits almost all corners of the economy, tax collections, and GDP growth, every parameter is struggling to make a recovery. It is the core responsibility of the fifteenth finance commission to evaluate the state of government finances; recommend the sharing of taxes between states and centre; and lay down the principles determining the distribution of these taxes among states. In this context, the 15th Finance Commission will take a final call on how much of tax collections the Centre’s Narendra Modi government must share with various states.

Fiscal deficit

On the back of rising expenditure to support lives and livelihood amid pandemic, the government has already crossed the full-year fiscal deficit target. For April-July, the centre’s fiscal deficit stood at Rs 8.21 lakh crore, or 103 per cent of 2020-21 budget estimates of Rs 7.96 lakh crore, compared to 77.8 per cent for the same period last year. During the last fiscal, the fiscal deficit had crossed 100 per cent of the full-year estimates by October-end.

GDP growth

Adding to the woes, the Indian economy shrank by a record 23.9 per cent in the first quarter, as the country went into the lockdown to curb the spread of the coronavirus. The real GDP fell to 26.9 lakh crore and the nominal GDP fell to Rs 38.08 lakh crore, which is a 22.6 per cent fall on-year.

Expectations from the meeting

“The Commission completed the first part of its mandate by submitting the report for FY 2020-21 in December 2019 much before the advent of the pandemic and now the due date for the submission of the final report is fast approaching on 30 October,” Divakar Vijayasarathy, Founder and Managing Partner, DVS Advisors LLP, told Financial Express Online. The ground situation has completely transformed from December and the agenda for discussion is aptly the most happening and critical subjects of GDP, taxes, and GST compensation, Divakar Vijayasarthy added.

The commission in its December report recommended a reduction of 1 per cent in the share of central taxes to state, which is to be used especially for J& K and Ladhak. It will be interesting to see if the commission would recommend increasing the share of taxes considering the stretched state finances due to the pandemic and a different option for GST compensation, giving ammunition to the state coffers. The case for permitting states to borrow on acknowledged central government receivables might get prominence, Divakar Vijayasarthy further said. Meanwhile, the performance-based grants and horizontal devolution might be driven predominantly based on the central government’s reforms agenda at a time when resources are severely constrained.

Source : Economic Times