FINANCE COMMISSION
Background
The Finance Commissions
? Under the provisions of Article 280 of the Constitution, The President is required to appoint a Finance Commission for the specific purpose of devolution of non-plan revenue resources. The functions of the Commission are to make recommendations to the President in respect of : ? (i) the distribution of net proceeds of taxes to be shared between the Union and the States and the allocation of share of such proceeds among the States. ? (ii) the principles which should govern the payment by the Union of grants-in-aid to the revenues of the States ? (iii) any other matter concerning financial relationship.
Recommendations of Finance Commission
? The appointment of the Finance Commission is of great importance, for it enables the financial relationship between the Centre and the units to be altered in accordance with changes in need and circumstances. The elasticity in relationship introduced by this provision has great advantage. ? The Recommendations of the Finance Commission can be grouped under three heads : ? (a) Division and Distribution of income tax and other taxes ? (b)Grants-in-aid ? (c) Centres; loans to States
Division and Distribution of Income Tax
? The personal income tax is imposed and collected by the Union government but the net proceeds are shared between the Centre and the States under Article 270 of the Indian Constitution. The Finance Commissions have to give their award on two points : ? (a) the share of the States in the total collection of income tax and ? (b) the principles which should govern the share of each State in the divisible pool. The First Finance Commission recommended that the States should share 55% of the proceeds of the income tax. But the successive Finance Commission had raised the States¶ share in income tax to the level of 85%. The Tenth Finance Commission recommended that 77.5% of the net proceeds of taxes on income should be assigned to States.
Basis of Distribution
? As regards the basis for the distribution of the States¶ pool of income tax proceeds among the States, the first few recommendations had used the double criteria of population and tax collection. The First Finance Commission for instance, recommended the allocation of income tax proceeds on the basis of 80% and 20% for population and collection. This criterion benefited populous states as well as those richer states which contributed more income tax revenue. The Second FC regarded population of the state as a more important basisfor distribution and awarded that 90% of the states divisible pool of income tax should be distributed on the basis of population.
New formula
? ? ? For the first time, the Eighth FC introduced a new formula for distribution of the income tax proceeds among the states: (a) 10% would continue to be distributed among the States on the basis of collection of income tax. (b) 90% of the proceeds would be distributed among the States as : (i) 25% on the basis of population. (ii) 25% on the basis of inverse of the per capita income of state multiplied by population. (iii)50% on the basis of the distance of the per capita income of a state from the highest per capita income state (i.e. Punjab) and multiplied by the population of the State. The basic objective of this three factor formula was to bring about a high degree of equity among the States.
Grants-in-aid to the States
? List II of the Seventh Schedule of the Indian Constitution has entrusted important welfare and development functions to the states but the various tax resources provided the States in the constitution were found to be inelastic and wholly inadequate. It was to overcome this problem that the Constitution provided for a mechanism of grants from the Centre to the States. Grants-in-aid may take the general form of aid to overcome current revenue deficits or to correct inter-state disparities in resources. Grants-in-aid may be for specific purposes such as the promotion of education in a backward state or for toning up of administration and so on.
Loans by the Centre to the States
? The Second Finance Commission was asked to go into the question of Centre¶s loans to States which were mounting. ? The Fourth Finance Commission suggested the formation of a Competent body to study in detail the entire problem of indebtedness of States but nothing came out of this suggestion. ? The Fifth FC recommended that the States should balance their budgets and manage their affairs. ? The Sixth FC made a detailed study of debt position of the States and recommended the consolidation and spreading out of repayment over 15 to 30 years. ? The Ninth FC was against such steps and asked states to be careful and exercise restraint in incurring additional debts.
doc_477298068.ppt
Background
The Finance Commissions
? Under the provisions of Article 280 of the Constitution, The President is required to appoint a Finance Commission for the specific purpose of devolution of non-plan revenue resources. The functions of the Commission are to make recommendations to the President in respect of : ? (i) the distribution of net proceeds of taxes to be shared between the Union and the States and the allocation of share of such proceeds among the States. ? (ii) the principles which should govern the payment by the Union of grants-in-aid to the revenues of the States ? (iii) any other matter concerning financial relationship.
Recommendations of Finance Commission
? The appointment of the Finance Commission is of great importance, for it enables the financial relationship between the Centre and the units to be altered in accordance with changes in need and circumstances. The elasticity in relationship introduced by this provision has great advantage. ? The Recommendations of the Finance Commission can be grouped under three heads : ? (a) Division and Distribution of income tax and other taxes ? (b)Grants-in-aid ? (c) Centres; loans to States
Division and Distribution of Income Tax
? The personal income tax is imposed and collected by the Union government but the net proceeds are shared between the Centre and the States under Article 270 of the Indian Constitution. The Finance Commissions have to give their award on two points : ? (a) the share of the States in the total collection of income tax and ? (b) the principles which should govern the share of each State in the divisible pool. The First Finance Commission recommended that the States should share 55% of the proceeds of the income tax. But the successive Finance Commission had raised the States¶ share in income tax to the level of 85%. The Tenth Finance Commission recommended that 77.5% of the net proceeds of taxes on income should be assigned to States.
Basis of Distribution
? As regards the basis for the distribution of the States¶ pool of income tax proceeds among the States, the first few recommendations had used the double criteria of population and tax collection. The First Finance Commission for instance, recommended the allocation of income tax proceeds on the basis of 80% and 20% for population and collection. This criterion benefited populous states as well as those richer states which contributed more income tax revenue. The Second FC regarded population of the state as a more important basisfor distribution and awarded that 90% of the states divisible pool of income tax should be distributed on the basis of population.
New formula
? ? ? For the first time, the Eighth FC introduced a new formula for distribution of the income tax proceeds among the states: (a) 10% would continue to be distributed among the States on the basis of collection of income tax. (b) 90% of the proceeds would be distributed among the States as : (i) 25% on the basis of population. (ii) 25% on the basis of inverse of the per capita income of state multiplied by population. (iii)50% on the basis of the distance of the per capita income of a state from the highest per capita income state (i.e. Punjab) and multiplied by the population of the State. The basic objective of this three factor formula was to bring about a high degree of equity among the States.
Grants-in-aid to the States
? List II of the Seventh Schedule of the Indian Constitution has entrusted important welfare and development functions to the states but the various tax resources provided the States in the constitution were found to be inelastic and wholly inadequate. It was to overcome this problem that the Constitution provided for a mechanism of grants from the Centre to the States. Grants-in-aid may take the general form of aid to overcome current revenue deficits or to correct inter-state disparities in resources. Grants-in-aid may be for specific purposes such as the promotion of education in a backward state or for toning up of administration and so on.
Loans by the Centre to the States
? The Second Finance Commission was asked to go into the question of Centre¶s loans to States which were mounting. ? The Fourth Finance Commission suggested the formation of a Competent body to study in detail the entire problem of indebtedness of States but nothing came out of this suggestion. ? The Fifth FC recommended that the States should balance their budgets and manage their affairs. ? The Sixth FC made a detailed study of debt position of the States and recommended the consolidation and spreading out of repayment over 15 to 30 years. ? The Ninth FC was against such steps and asked states to be careful and exercise restraint in incurring additional debts.
doc_477298068.ppt