14th Finance Commission: Government accepts recommendations

The government recently accepted the 14th Finance Commissions recommendation to devolve an
unprecedented 42% of the divisible tax pool to states during 20015-16 to 2019-20, against 32%
suggested by the previous commission. Henceforth, States will get a much higher share of central
taxes.
Recommendations of the 14th Finance Commission:
The Y V Reddy-headed 14th finance commission recommended tax devolution form a larger part of
the transfers from the Union government than earlier. It had suggested the Centre devolve Rs 39.48
lakh crore of tax receipts during the five years starting next financial year.
Other important recommendations:
Set up an independent council to undertake assessment of fiscal policy implications of Budget
proposals
Replace existing FRBM Act with a debt ceiling & fiscal responsibility law
Wind up National Investment Fund and maintain all disinvestment receipts in the consolidated fund
Amend electricity Act to provide for penalties for delay in payment of subsidies by state governments
Submission of states on minimum guaranteed devolution turned down
Steps for states to augment revenues, such as property tax reforms and issuance of municipal bonds
suggested
Set up autonomous and independent GST compensation fund
The commission suggested performance-based grants to panchayats and local bodies. It was
recommended the ratio of basic-to-performance grant be kept at 90:10 for panchayats and 80:20 for
municipalities. The Commission had also asked to do away with a distinction between Plan and nonPlan expenditure.
Its implications:
This move implies that grants for centrally sponsored schemes will have to be curtailed.
The acceptance of the recommendations mark at least five major shifts from the past. They are:
the sizeable increase in tax devolution.
taking into account plan revenue expenditures while assessing revenue deficit grants.
discontinuing the distinction between special category and other states.
desisting from awarding sector/state specific grants or to subject grants to conditionality.
to suggest institutional mechanisms for better monitoring of fiscal rules and to achieve cooperative
federalism.
This will be a huge help to states in forging their own autonomously generated development scheme
and keeping their fiscal deficit in check in the years to come.
The decision will enable the states to utilise the enhanced resources according to the felt needs of the
residents of the state.
By accepting the recommendations of the finance commission, the Centre also has implicitly
endorsed the fiscal deficit target of 3.6% of GDP for FY16 and 3% thereafter.