FFC

The 14th Finance Commission (FFC) was constituted by the orders of President on 2nd January, 2013 and submitted its report on 15thDecember, 20
. The recommendations of the commission entered force on April 2015; they took effect for a five-year period from that day.
Vertical Balance- Proceeds of Taxes to be divided between union and the states usually reoffered to as the “Vertical Balance
Horizontal Balance- The Allocation of distribution of taxes among the states usually reoffered to as the horizontal balance
The FFC was guided by the terms of Reference(ToR): The approach of previous finance commissions The prevailing macro economic situations in particular the fiscal environment of the
country And the evolving circumstances relevant to ToR . The relevant deliberations in the meetings of the NDC , the views of the Administrative Reform Commission(1966), National
Commission on Review of the working of the Constitutions , Commission on Centre-State Relations( Sarkaria Commission-1988 and Puncchi Commission-2010
The FFC followed the work process and procedures followed by earlier commissions which includes: Internal procedures Consultations with the states, ministries in union government,
experts, political parties, local bodies and others. The number of studies were commissioned In order to obtain an overview of state finance from local experts, the FFC commissioned
studies for every state through universities and institutions located in those states. This was in addition to previous practices of engaging the National Institute of Public Finance and
policy(NIPFP) and other institute to study select subjects

GST

GST is a tax on supply of goods or services or both and a single tax on entire value chain of supply, right from the manufacturer to the consumer. Credit of input taxes paid at each stage
will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged
by the last dealer in the supply chain, with set-off benefits at all the previous stages. Central / State Excise duty and VAT would be continued on five Petroleum products, which would be
subject to the levy of GST whenever notified on the recommendation of the GST Council. Tobacco products could be subjected to both Central Excise duty and GST. Alcoholic liquor for
human consumption had been kept outside the ambit of GST.
There are three components of GST as follows : -
• Central Goods and Services Tax (CGST) : payable to the Central
Government on supply of goods and services within the State/Union
Territory.
• State/Union Territory Goods and Services Tax (SGST/UTGST) : payable to
the State/Union Territory Government on supply of goods and services
within the State/Union Territory.
• Integrated Goods and Services Tax (IGST) : in case of inter-state supply of
goods and services, IGST is levied by the Government of India.
OBJECTIVES ; - Reduce tax cascading - Ushering in a common market - Simplified tax regime and -Self regulating and non-intrusive E-tax system
MEANS TO ACHIEVE- Unifying multiple central and state taxes-Simplified Tax structure–IT enabled compliance
MECHANISM–Subsuming of 37 central and state taxes –Eliminating multiplicity of tax rates–Simplified forms and procedures–System verified seamless flow of ITC (GSTR 1, 2 & 3)--Single
IT based Interface for Tax Payer–IT based Tax Administration.

FRMB REPORT SUMMARY

he FRBM Review Committee was formed in 2016 under the chairmanship of N.K.Singh with a mandate to review the Fiscal Responsibility & Budget Management (FRBM) Act. The major
recommendations of the N.K.Singh Committee are discussed below.
● It proposed to replace the FRBM Act, 2003 with a Debt Management and Fiscal Responsibility Bill, 2017.
● Debt to GDP Ratio
● The debt to GDP ratio should be 38.7% for the central government, 20% for the state governments together by the FY 2022 – 23.
● Fiscal deficit
● By FY 2022 – 23, the fiscal deficit should be 2.5% of GDP.
● The committee recommended achieving the above targets by a ‘glide path’, that is, a steady progress towards them, by achieving annual targets until 2023.
● Fiscal Council
● It recommended the setting up of an autonomous Fiscal Council, whose role would be:
● To prepare multi-year fiscal forecasts.
● To improve fiscal data quality.
● To suggest changes to the fiscal strategy.
● To advise the government on fiscal matters.
● The committee recommended that the government could deviate from the targets in the following scenarios:
● National calamity, war, in considerations of national security, agricultural collapse affecting incomes and outputs.
● Structural reforms in the economy having fiscal implications.
● A decline in real output growth of at least 3% below the average of the previous four quarters.
● The 15th Finance Commission should recommend the debt trajectory for each state based on their track record of fiscal health and prudence.
● The centre should borrow from the Reserve Bank of India only when:
● It has to meet a temporary shortfall in receipts.
● RBI subscribes to g-secs to fund any deviation from the prescribed targets.
● RBI buys g-secs from the secondary market.
● Compatibility of monetary and fiscal policies
● The committee recommended that both the monetary and fiscal policies must ensure macroeconomic stability and growth in a complementary manner.
● To this end, the inflation targeting regime and fiscal rules have to interact with each other.
PARETO OPTIMALITY
According to this criterion any change that makes at least one individual better-off and no one worse-off is an improvement in social welfare. It can also be stated that a situation in
which it is impossible to make any one better-off without making someone worse-off is said to make anyone better off without making someone worse-off is said to be Pareto-optimal or
Pareto efficient.
For attaining a Pareto-efficient situation, the following three marginal conditions must be satisfied:
(i) Efficiency of distribution of commodities among coreumers (efficiency inexchange); (ii) Efficiency of the allocation of factors among firms (efficiency of production) (iii) Efficiency in the
allocation of factors among commodities (efficiency in the product-mix, or composition of output
1. Optimum distribution (exchange) of Commodities among the consumers.
Pareto Optimality in exchange is achieved when allocation of commodities among the consumers is such that it is not possible to increase the satisfaction of any person without reducing
the satisfaction of someone else. This condition will be achieved when marginal rate of substitution between any two commodities is the same for every consumer.
MRSA-MRS
2. Optimum allocation of factors among the firms.
This is the second condition of Pareto-optimality and is known as efficiency in production. It requires the facters are allocated to the various commodities that it is not possible to
increase the output of any commodity by re-allocating factors without causing decrease in the production of another. This condition will be fulfilled when marginal rate of technical
substitution (MRTS) between L and K is the same for both X and y produced by both the firms. That is: MRTS LK MRTS LK.
3. Efficiency in the composition of output (product mix). This condition states that to optimise the social welfare in the Paretian sense the bundle of factors used and goods produced in
the economy be so organised that greater satisfaction of one person is impossible without loss for another. The fulfillment of this condition requires that marginal rate of technical
substitution (MRT) between the two products must be equal to Marginal Rate of Substitution (MRS) between the two products for the consumers (A and B). In short:
MRPTxy = MRSA, MRSB

MARKET FALUIRE
Perfect competition leads to the following:
(i) Pareto optimality in production. (i) Pareto optimality in production-cum-exchange.
However, in the real world, perfect competition does not exist. In other words,
in the real world, we find a situation of market failure. There are number of factors which are responsible for market failure. The
important factors are as follows:
1. Market power. There are many assumptions of perfect competition which
are not to be found in the real life. This situation of market failure leads to the
emergence of imperfect competition where due to less output and higher prices,
resources are mis-allocated. 2. Externalities. There are many situations in real life when costs and benefits, which are supposed to be paid by the third parties, are not paid by them. Such
spill-over of costs or benefits are called externalities. Externalities can be of the types-(a) external economy and (b) external dis-economy. When the decision o some firm benefits others
for which the firm is not paid, it is a case of external economy for others (who are benefited). When the decision or action of an individual creates costs for others which they do not pay,
it is a case of external dis-economy. The existence of externalities creates a situation where there is a difference between private cost and social cost. Therefore, in such a situation
market price will not reflect the real cost, it will reflect only the private cost and not the social cost.
3. Incomplete information. Theoretically, it is assumed that price determination and consumer behaviour are based on the assumption that firms and households have complete
information. However, in real life neither the households ner the firms have the complete information. Because of this, prices are not what they ought to be. In other words, a situation
of market failure exists. Because of this we often find that price of a commodity differs from seller to seller because consumers do not have the complete information about the market.
Like consumers, at times, firms also suffer because information available to them is not adequate and complete.
4. Presence of public goods. Presence of public goods is another source of market failure. A public good is that which is non-rival and non-excludable. A good is a non-rival in
consumption when its consumption by the person is not interfered by some other person. Those produced goods, from which people can not be excluded from availing of their benefits
are called non-excludable goods.
Public goods being non-rival, their benefits accrue to all, but this is not true in the case of private goods. This is a case of market failure. The same analysis holds good in the case of
non-excludable goods. Benefits of such goods ar available to all whether one pays for them or not.

PUBLIC GOODS
Most of the goods we buy are produced by private firms and are called private goods. A number of goods we consume are not produced by private firms, but by public agencies. These
are called public goods. For example, national defence, pollution control, police, parks and fire protection
A number of other goods have both public and private characteristics. They are
known as quasi-public goods. For example, public roads, education and libraries. Public goods have two characteristics-they are non-rival and non- excludable. A good is a non-rival in
consumption when two persons can consume the same thing, i.e., one person's.
consumption of it does not interfere with the consumption of it by the other. A good is non-excludable, once produced, people cannot be excluded from enjoying its benefits. There are
many economic implications of public goods like external benefits (positive) and market failure (negative). 1. Efficiency and public goods. The production of public goods clearly generates
external benefits. The market will not provide the efficient or optimum
amount of the public good. A public good is provided efficiently when Marginal
Social Benefits (MSB) Marginal Social Costs (MSC).
In the given diagram, market demand curve for a public good is derived by
adding up marginal benefits enjoyed by two consumers A and B (MBA and
MBB) respectively. The MSB curve shows that society is willing to pay price OP for OQ, units of public good. The efficient amount of output is given by point E, where MSB MSC. It shows
OQ₂ is the efficient output level.

CHARACTERISTICS OF PUBLIC GOODS

Public good has two following characteristics: 1. It is non-rival in consumption. This means that with a given level et production, consumption by one person need not diminish the
quantity consumed by anyone else. In fact, non-rival consumption means potential simultaneous
consumption of a good or service by the society or many households. 2. The second characteristic of public good is non-exclusion. This means that it is not possible to confine the
benefits of a good once produced to only 1 selected few in the society. That is, any person can benefit from production of the
good regardless of whether the person has paid for it or not. External costs refer to the situation when externalities are harmful for the society. On the other hand, when externalities are
beneficial then these are called external benefits.
An example of external cost is air pollution accompanying the production of a commodity. On the other hand, an example of external benefit is the reduced chance of spreading a
communicable disease when an individual is inoculated
against it. Presence of external costs and benefits in both production and consumption cause reduction in economic efficiency and market failure so that Pareto optimal situation cannot
be achieved even under perfect competition. The reason is that
in the presence of externalities private and social costs or benefits differ. To make them equal in order to achieve efficiency, Government must intervene either through enacting property
rights or through imposition of tax in case of external cost and provision of subsidy in case of external benefits or both.
EXTERNALITIES

Since externality causes market failure, one solution to achieve competitive equilibrium is to internalize externality. This means that in case of two firms, where one firm's production
negatively affects the production of the other firm through pollution, then both firms should be merged which will ensure the sum of the Marginal External Costs (MEC) of both the firms
equal to zero and the new management will minimise social costs of production rather than private costs.
This solution is applicable for both negative (as said) and positive externalities. In the latter case the solution is equalizing Marginal Social Costs (MSC) with Marginal Social Benefits
(MSB).
In a real world situation, where merger is not always possible, the government takes action through taxation in case of negative externalities and subsidies in case of positive externalities
which can bring similar results in the following way We know that a competitive market has equilibrium when
MC, P, where x is output MC Marginal Cost (Private)
P- Price
Let production of x create pollution so that the society bears external cost. Then MSC, MC,+ MEC
For competitive solution MSC, P
Then this implies that there is divergence between MSC, and MC, ie, MSC, MC,, which can be bridged by taxation which is equal to MEC. In Diagram 1, the private optimal output is x_{i}
where M*C_{2} = P_{1} But MSC, MC Sotax = TE so that socially optimal output is at X_{1}, iz, P = MSC In Diagram 2, due to positive externality MC> MSC so that the government
gives subsidy Marginal External Benefits (MEB), NE,. Accordingly output
increases to X 1 .

SALES TAX SHARING

When a sales tax is imposed, the supply curve of the commodity shifts upwards to the left by the amount of the tax. This leads to fall in quantity and increase in price of the commodity.
If the increase in price is less than the tax imposed then the burden of tax is shared between buyers and sellers as per ratio of elasticity of supply (e_{z}) and elasticity of demand (e.).
B/S = c_{2}/c_{2}
where [B Buyer's burden, S=? Seller's burden
To prove this, we use the following diagram: The original equilibrium with demand D_{6} equal to supply S_{0} is at point E Equilibrium price is overline OP 0 and quantity is O*Q_{o} Let
a sales tax of amount ! be imposed. Accordingly, supply S_{0} shifts to S' upwards by amount ! .i.c,S^ prime -S 0 =t. New equilibrium with D 0 =S^ prime is at point E. At new equilibrium
point, tax = ET=S-So
At new price = OP, quantity falls to OQ' from O*Q_{0} so that DQ = Q_{0}*Q
Now increase in Price=OP - OP = PoP' = E'N Since tax = ET = E'N + NT The increase in price is less than tax. Hence both buyer and seller share the burden of tax. Since increase in price is
E'N, the share of buyer is E^ prime N and the
rest amount NT is seller's burden. B S = E^ prime N NT
(EN)/(NT) = m/(co) To prove that , we have to find c_{1} and c_{d} separately. Now find e, along supply curve S_{0} where point has changed from E_{0} to T
c j = Delta Q Delta P . P Q
e s = Q 0 Q^ prime P 0 P^ prime prime . OP 0 OQ 0
c s = Q 0 Q^ prime NT * OP 0 OO 0
...[Since P 0 P^ prime prime =NT
Similarly, find c_{d} on the demand curve D_{0} where point has changed from E_{0} to E.
e d = Delta Q Delta P . P Q
e 4 = Q 0 Q^ prime P 0 P^ prime * OP 0 OQ 0
Economic v. Statutory Incidence Economic incidence of a tax refers to the individual or group of individuals who ultimately bear the actual cost of the tax. Statutory incidence refers to
the individual or group of individuals who are responsible for physically remitting a particular tax to the government. Economic and statutory incidence may or may not coincide. For
example, the statutory incidence of the corporate income tax falls on corporate executives. The economic incidence of the tax, however, falls on individual workers in the form of lower
wages, individual consumers in the form of higher prices, and/or individual shareholders in the form of lower returns on their investment.