Finance Commission for higher share to states in central taxes, Modi says will strengthen federalism

New Delhi: The Finance Commission has suggested raising share of states in central taxes to 42 per cent from current 32 per cent. As per the increased devolution suggested in the report of the 14th Finance Commission, the states will get Rs 3.48 lakh crore in 2014-15 and Rs 5.26 lakh crore in 2015-16.

"The higher tax devolution will allow states greater autonomy in financing and designing of schemes as per their needs and requirements," the report said.

Accepting recommendations of the 14th Finance Commission, Prime Minister Narendra Modi wrote to all state governments saying the Centre has decided to devolve maximum money to states and allow them the required freedom to plan the course of states' development. Addressing the chief minister, the Prime Minister said his government has been working to strengthen India's federal polity and promote cooperative federalism.

Appealing to the states, he said that strong states are the foundation of a strong India and progress of the country depends on the progress of states. The Centre is committed to the idea of empowering states in all possible ways, he said.

"We also believe that states should be allowed to chalk out their programmes and schemes with greater financial strength and autonomy, while observing financial prudence and discipline," said Modi.

"We are clear that without this, local development needs cannot be met and marginalised communities and backward regions cannot be brought into the mainstream," he added.

While Abhijit Sen, part-time member of the Commission headed by YV Reddy, gave a dissenting note, the government accepted the majority decision on tax devolution to the states. Sen, in his note, favoured devolution of 38 per cent of the divisible pool in the first year. After assessing the revenue and expenditure of the states for the period 2015-20, the Commission has recommended a grant of Rs 1.94 crore to meet the deficit of 11 states.

"The consequence of this much greater devolution to the states is that the fiscal space for the centre will reduce in the same proportion," the report said, adding that the dominant view was that the majority of the resources should flow in the form of tax devolution.

An overwhelming majority of states have suggested reducing the number of Centrally sponsored schemes as well as outlays on them, the Finance Commission report said. Keeping in the mind the spirit of cooperative federalism that has underpinned the creation of NITI Aayog the government has accepted the recommendation of FFC to keep the states share of Union Tax proceed (net) at 42 per cent, official sources said. Observing that states will see a quantum jump in transfers, sources said, this is the largest ever change in the percentage of devolution.

In the past, when Finance Commissions have recommended an increase, it has been in the range of 1-2 per cent increase. "As compared to the total devolutions in 2014-15, the total devolutions of the states in 2015-16 will increase by over 45 per cent." The Commission has recommended distribution of grants to states for strengthening duly elected gram panchayats and municipal bodies. These grants will be divided into basic grants and performance grants.

The total grant to the local bodies including panchayats and local bodies for the five-year period ending March 31, 2020 works out to Rs 2.88 lakh crore. The government, sources said, has also accepted the recommendations of the Commission with regard to devolution of higher resources to the local bodies. With regard to the centrally sponsored schemes (CCS), it has identified 30 schemes for transfer to the states after taking into account higher devolution.

However, sources said, that in view of the importance of the schemes and legal obligations, only 8 CCS would be delinked from support from the centre.

As for the other suggestions of the Commission with regard to promoting cooperative federalism, implementation of the Goods and Services Tax (GST), fiscal consolidation, pricing of public utilities and public sector enterprises, sources said they would be examined by the government in due course.