Fifteenth Finance Commission: The Merits Of A Tenure Extension

It is widely reported in the press that the government is considering extending the term of the Fifteenth Finance Commission by another six months. The Presidential Order appointing the Commission had required it to submit the report by Oct. 31. Later, while issuing an additional term of reference to examine whether “….a separate mechanism for funding of defence and internal security ought to be set up and if so, how such a mechanism could be operationalised”, the term was extended to Nov. 30. As the 14th Finance Commission's recommendations are applicable only until 2019-20, the recommendations of the 15th Commission are important for determining the tax devolution and grants to the states for preparing the budget for 2020-21. In case, the tenure is extended, an additional ToR asking the Commission to submit an interim report for the year 2020-21 will have to be issued.

Is An Extension Needed?

It appears that there are strong reasons for the Commission's term to be extended.

The first and foremost is the decision to remove the statehood to Jammu and Kashmir, and make Jammu and Kashmir a union territory with a legislature and Ladakh a UT directly-administered by the centre.

Ordinarily, it should be excluded like in the case of Delhi and Puducherry. However, in this exceptional situation in which the decision to abolish the statehood of Jammu and Kashmir was taken almost towards the end of the Commission's deliberations, it may be asked to continue the practice in which case, an additional ToR may have to be issued under Article 280 (3 d) of the Constitution (any other matter in the interest of sound finance). However, this is going to create a tricky issue as both Delhi and Puducherry have been seeking to be included in the Finance Commissions' recommendations, which has not been acceded to so far.

Second, besides the poor revenue performance of the Goods and Services Tax, the recent decision to reduce the corporation tax would have significant implications for projecting the revenues for five years and these will have to be carefully examined and incorporated in its projections.

Third, the deceleration in growth and low inflation has substantially slowed down the nominal gross domestic product growth which is the main tax base proxy and making projections of tax revenues and expenditures based on this could pose serious risks.

There are cases in the past when the Finance Commission's tenure was extended requiring them to submit an interim report for the first year and the main report later. 

Past Extensions

The 8th Finance Commission was initially required to submit its final report by October 1983, but through a Presidential Order, the term was extended up to February 1984 and was asked to submit an interim report by November 1983 covering as many of the ToR as it finds feasible. In the interim report, the 8th Finance Commission made provisional recommendations for 1984-85 in which it continued with the tax devolution scheme of the previous Commission and recommended grants based on its own projection of revenues and non-plan expenditures of the states. The final report submitted in February 1984 covered all the five years beginning April 1984 and partially modified the grants portion of the recommendation for 1984-85.

The 9th Finance Commission was asked to submit two reports in the Presidential Order appointing the Finance Commission itself, an interim report for the year 1989-90 and the final report for five years beginning April 1990 to align the Commission's recommendations with the period of the Seventh Five Year Plan.

Another case was that of the 11th Finance Commission which was required to submit its report by the end of December 1999, but due to the premature dissolution of Lok Sabha in April 1999 and the subsequent elections, the Commission sought extension which was given first up to June 2000. However, an additional TOR was issued to the Commission in April, 2000 stating, “The Commission shall draw a monitorable fiscal reforms programme aimed at reduction of revenue deficits if the States and the manner in which grants to the States to cover the assessed deficits in the non-plan revenue account may be linked to progress in implementing the programme” and the tenure was extended up to August 2000.

Navigating An Extension

If the 15th Finance Commission's tenure is extended, they may be asked to submit an interim report for 2020-21 because the decisions on tax devolution and statutory grants for 2020-21 based on its recommendations will have to be included in the budget.

However, a continued presence of the Commission after the interim recommendation would expose it to scrutiny. If it continues with the devolution of 42 percent of the divisible pool, as was done by the previous Commission, and recommends grants according to its own assessment of revenues and expenditures for 2020-21, it may not attract much criticism. At the same time, it may generate the expectation that despite all the pressures and nudging, the Commission may not reduce the share of the states in tax devolution even for the remaining period of its recommendation.

The Commission will also get some additional time needed for analysis the fiscal trends in Central and state governments in the light of the new political changes and economic trends. The developments on this front will be keenly watched ad they would have significant implications for fiscal federalism.

M Govinda Rao is Counsellor at Takshashila Institution, and was a member of the 14th Finance Commission. Views are personal.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.