13th Finance Commission Recommends Fiscal Roadmap For India

by Mary Swire, Tax-News.com, Hong Kong

05 January 2010

The Thirteenth Finance Commission, chaired by Vijay Kelkar has submitted a report to the Indian government covering fiscal recommendations for the period 2010-15. Although not to be published until February 2010, key elements of its contents have already been disclosed.

The Thirteenth Finance Commission was constituted in 2007 under article 280 of the Constitution to determine the sharing of tax revenues between the central government and the states, as well as to make recommendations on matters such as fiscal prudence.

It has been widely reported that the report recommends an increase in the share of total tax revenue allocated to the states; previously recommended to be 30.5% of total revenue by the Commission, some newspapers suggest that the increase proposed could be 1%.

This takes on extra relevance in the context of the introduction of the new Goods and Services tax - which is the subject of much wrangling between the central government and the states as to how to allocate the tax in a 'tax-neutral' way.

The report is said to recommend a new council of state finance ministers to determine compensation to individual states for any loss in revenues due to GST, and to suggest structural improvements to GST.

The Fiscal Responsibility and Budget Management Act laid down requirements for a progressive reduction in fiscal and revenue deficits, but the fiscal stimulus during the economic crisis meant that the fiscal deficit for 2008-09 stood at 6.2% of gross domestic product, more than double the target; a further increase to 6.8% is projected for the current tax year.

The Commission has set out a workable plan which will enable the government to meet fiscal consolidation targets set by the 13th Finance Commission in the five years between 2010 and 2015, according to Kelkar.

The Commission's fiscal 'roadmap' also includes accounting for central government expenditure financed by oil, food and fertilizer bonds, which, according to commentators, had been used to circumvent previous targets set by the Commission, because they were not included in the fiscal statistics for measuring deficits.

The report will be debated in parliament along with the Economic Survey for 2009-10 before the Budget is presented by finance minister Pranab Mukherjee in February. Mukherjee said the Commission's recommendations “would be reflected in the 2010-11 Budget".

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