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14th Finance Commission (FFC) Report
Feb 26, 2015

Article 280 of the Constitution of India requires the Constitution of a Finance Commission every five years, or earlier.  For the period from 1st April, 2015 to 31st March, 2020,  the 14th Finance Commission was constituted on 2nd January, 2013 under the Chairmanship of former Reserve Bank Governor Y.V. Reddy. The Commission submitted its report on 15th December, 2014. Central Government accepts the report in principle.

Highlights of the Recommendations

  • Devolution to states: States’ share in net proceeds from tax collections be 42%—a huge jump of 10% from 32% recommend by the 13th Finance Commission, and the largest change ever in the percentage of devolution

  • Big jump in tax share: Compared with 2014-15, the total devolution to states in 2015-16 will increase by over 45%

  • Resource transfer: Tax devolution be the primary route resource transfer to states

  • NITI connect: The government has accepted the recommendations in view of the spirit of the National Institution for Transforming India (NITI)

  • Grants: Should be distributed to states for local bodies on the basis of the 2011 population data; the grants be divided into two broad categories on the basis of rural and urban population—constituting gram panchayats, and constituting municipal bodies

  • Types of grants: A basic grant and a performance grant—the ratio of basic to performance grant be 90:10, with respect to panchayats; and 80:20 in the case of municipalities

  • Total grants: Rs 2,87,436 crore for a five-year period from April 1, 2015, to March 31, 2020; of this, Rs 2,00,292.20 crore to be given to panchayats and Rs 87,143.80 crore to municipalities

  • Grant transfers: For 2015-16, transfers will be to the tune of Rs 29,988 crore

  • Disaster relief: The percentage share of states to continue as before and follow the current mechanism—to the tune of Rs 55,097 crore. After implementation of GST, disaster relief will be given according to the recommendations of the Finance Commission

  • Post-devolution revenue deficit grants: A total of Rs 1,94,821 crore on account of expenditure requirements of states, tax devolution and revenue mobilisation capacity of the states. These will be given to 11 states

  • Delinking of schemes: Eight centrally sponsored schemes (CSS) will be delinked from support from the Centre; various CSS will now see a change in sharing pattern, with states sharing a higher fiscal responsibility

  • Cooperative federalism: There are recommendations on cooperative federalism, GST, fiscal consolidation road map, pricing of public utilities and PSUs, too.

Other Features

  • Financial year 2016 Devolution of Net Taxes to States at Rs.5.26 lakh crore 

  • States should use Extra Fiscal Space for Productive Assets 

  • Fiscal Situation of Centre-States combined remains a challenge 

  • Most of tax share proposals of Finance Commission have been accepted 

  • Recommends omitting effective revenue gap from Financial Year 2016 

  • GST Likely to significantly boost government Tax Revenue 

  • Recommends Fiscal Deficit Ceiling of 3% financial year 2017 onwards 

  • Considerable scope for increasing Tax-GDP Ratio 

  • Total devolution to states at Rs, 5.26 lakh crore in financial year 2016 

The Finance Commission is required to recommend the distribution of the net proceeds of taxes of the Union between the Union and the States (vertical devolution); and the allocation between the States of the respective shares of such proceeds (horizontal devolution).

The Finance Commission is also required to recommend on the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.

The Finance Commission is also required to make recommendation regarding the principles governing grants-in-aid of the States’ revenues, by the Centre. 

In addition to the recommendations regarding Vertical and Horizontal devolution and grants, the 14th Finance Commission has made certain other recommendations. These relate to cooperative federalism, Goods & Services Tax, Fiscal Consolidation Roadmap, Pricing of Public Utilities and Public Sector Enterprises. 

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