14th Finance Commission gives States a huge tax windfall

The 14th Finance Commission, headed by former RBI Governor Y.V. Reddy,  has recommended a 10 per cent jump in the devolution of tax revenues to States to 42 per cent, in keeping with Prime Minister Narendra Modi’s plans for greater flexibility to States. The total devolution to States will rise to 45 per cent of Union tax revenues in 2015-16.

In a letter to all Chief Ministers, the Prime Minister said the increase in resources given to States will give them the required freedom to tailor make development schemes to suit their needs.

The higher tax share to states would also have a significant impact on the Centre’s revenue and expenditure projections and the fiscal consolidation roadmap to be presented in the Union Budget 2015-16 on February 28.

The Commission has also recommended ₹2.87 lakh crore as grants to local bodies, using criteria of population and land area that would be divided into a basic grant and a performance grant. While panchayats would be given ₹2 lakh crore in grants, municipalities would receive ₹87,143 crore.

Though it did not award any special dispensation to debt-ridden States, the Commission has provided ₹1.94 lakh crore as a post devolution revenue deficit grant. This would help wipe out the revenue deficit of  States like Kerala, West Bengal, Himachal Pradesh and Andhra Pradesh.

The Commission has also  suggested that the government should set up a GST compensation fund to pay States for revenue losses once the goods and services tax is implemented. The compensation should be given to States for five years, with 100 per cent compensation being paid in the first, second and third years, and 75 per cent and 50 per cent compensation in fourth and fifth year, respectively.

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