The Narendra Modi government on Tuesday accepted recommendations of the 14th Finance Commission for increasing share of states in central taxes to 42%.
The commission recommended increase in the share of states in the centre's tax revenue from the current 32% to 42%-the single largest increase ever recommended. The recommendation, which the government will likely accept, will give more power to states in determining how they spend this money (it also correspondingly reduces the fiscal resources available to the centre).
Politically, the increase could also serve as a confidence-building measure, particularly relevant given that the centre and states are negotiating the introduction of a single goods and services tax (GST) under which the latter will forgo most of their taxation powers.
Once implemented, GST will stitch together a common national market by subsuming a welter of local levies such as octoroi, VAT and others into a single tax. Its implementation has faced political hurdles because states fear it will rob them of their fiscal powers.
The 14th finance commission had submitted its report to the President in December, specifying a new set of formulae for distribution of tax revenues and grants between states and the Centre.
Two distinctive features of the commission's work involve redressing the imbalances between the taxation powers and expenditure responsibilities of the centre and the states respectively and equalisation of all public services across the states.
Besides sharing of tax revenues, the commission has also laid down the principles for giving out grant-in-aid to states and other local bodies for five-year period beginning April 1, 2015.
The commission, headed by former RBI governor YV Reddy, has considered potential resources of the centre and the state for the five year period, taxation efforts and the potential of additional revenue mobilisation, demands on the resources of the centre, and the various requirements of states before finalising its revenue sharing formula.
The 13th finance commission headed by former finance secretary Vijay Kelkar had suggested 32% share for the states in the central revenues, but states have been demanding that the resources should be divided equally between the centre and states.
The finance commission is a body set up under Article 280 of the Constitution, primarily to recommend measures and methods on how revenues, need to be distributed the Centre and states.
Besides Reddy, the other members of the commission include Abhijit Sen, Member, Planning Commission, Sushama Nath Former Union Finance Secretary, M Govinda Rao, former Director of National Institute of Public Finance and Policy, Sudipto Mundle, former Acting Chairman, National Statistical Commission and AN Jha, secretary to the commission.