FEBRUARY 27, 2015

By TIOL Edit Team

THE 14th Finance Commission's (FFC's) report should be valued much more than its mandatory recommendations for sharing of central taxes between the Centre and the States.

FFC's report ought to be also viewed as document on comprehensive reforms in the fiscal domain that includes goods and service tax (GST) and property tax. The report also contains a slew of recommendations for improving the management of government expenditure, book-keeping and accountancy, public sector enterprises (PSEs), staff pay and office productivity, Centre-State economic cooperation, etc.

FFC's package of non-binding recommendations is the most comprehensive ever made by any FC.

Unfortunately, the Prime Minister Narendra Modi, in his letter to Chief Ministers, informing them of the Union's decision to accept FFC's award on tax resources devolution, is silent on the non-binding recommendations.

The non-binding reforms suggested by FFC should not meet the same fate as meted out to similar recommendations made by preceding FCs.

As in the case of non-binding recipe of previous commissions, the Finance Ministry has stated that FFC's recommendations other than devolution of resources would be “examined by the Government in due course in consultation with the concerned stakeholders.”

This has been the standard, convenient approach followed by the Government over the decades to selectively accept or reject or just shelve the commission's non-binding advice.

Modi Government should take a break from this practice. It can do this by setting timelines for taking decisions on FFC's non-binding recommendations. It can opt for setting of committees for working out details of recommendations that appear to be challenging.

Let it make a beginning by announcing the acceptance of FFC's recommendations relating to facilitation of delayed GST. FFC has recommended compensation to the States for any revenue loss during the first five-year transition period after launch of GST. It has also proposed creation of an autonomous, statutory GST compensation fund.

As aptly put by FFC, “ The Union Government may have to initially bear an additional fiscal burden arising due to the GST compensation. This fiscal burden should be treated as an investment which is certain to yield substantial gains to the nation in the medium and long run. We also believe that GST compensation can be accommodated in the overall fiscal space available with the Union Government.”

We hope Finance Ministry would also accept FFC's recommendation that “the Constitutional legislative and design aspects of the GST enable transition towards universal application of GST over the medium to long term, while making necessary provisions for smooth transition through temporary arrangements.”

In spirit of public accountability, "the Finance Ministry ought to accept the suggestion to set an independent fiscal council for undertaking ex-ante assessment of the fiscal policy implications of budget proposals and their consistency with fiscal policy and Rules.”

Both the Centre and the States should agree to amend their respective Fiscal Responsibility and Budget Management (FRBM) Act for adherence to fiscal discipline and for effective management of fiscal and revenue deficits.

FFC has rightly recommended that the Centre and the States should provide a statutory ceiling on the sanction of new capital works “to curb the scope for perverse allocation of available funds among competing projects and to ensure that the economy benefits from investments in capital works.”

The Centre should immediately put on the agenda for moribund Inter-State Council or the Governing Council of Niti Aayog the issue of hiking the ceiling on professions tax levied by the States as this requires an amendment of the Constitution.

FFC has recommended raising the ceiling of professions tax from Rs. 2500 per annum to Rs. 12,000 per annum. It has also mooted amendment of Article 276(2) of the Constitution to increase the limits on the imposition of professions tax by States.

It stated: “The amendment may also vest the power to impose limits on the Parliament with the caveat that the limits should adhere to the Finance Commission's recommendations and the Union Government should prescribe a uniform limit for all states.”

At present, twenty-one states impose professions tax through various laws. The tax is generally applicable to all persons engaged in any employment or in any profession in some States, but only to certain specified professions in others. In some States, the tax is levied and collected by the State Government alone, while in others such as Kerala and Tamil Nadu, local bodies also levy and collect the tax under the State legislation.

As for taxation reforms that don't require the Centre's intervention, the States and municipal bodies should pay heed to FFC's recipe on tapping of tax revenue potential of the real estate.

As put by FFC, “We suggest that the existing rules be reviewed and amplified to facilitate the levy of property tax and the granting of exemptions be minimised. The assessment of properties may be done every four or five years and the urban local bodies should introduce the system of self assessment. We recommend that action be taken by the States to share information regarding property tax among the municipalities, State and Union Governments.”

FFC has also aptly called for levy of vacant land tax by peri-urban panchayats. Such an impost should facilitate cultivation of fallow land especially in the possession of real estate companies.

In addition introduction of vacant land tax, FFC has suggested that a part of land conversion charges can be shared by State Governments with municipalities and panchayats.

In keeping with FFC's recommendation, the States should prepare a clear framework of rules for the levy of betterment tax, which is at present optional tax that can be levied by municipalities and panchayats.

There is also a merit in FFC's suggestion that States should consider taking steps to empower local bodies to impose advertisement tax on outdoor hoardings to improve their revenues.

Put simply, the States must put their act together to improve their resource mobilization and prevent revenue leakages instead of just clamouring for more tax revenue from the Centre.

There are also whole of diverse recommendations such as the ones relating to pricing of utilities and revision of wages of government employees that call for Centre-State consultations.

We expect Modi Government to rise to the occasion and interact with the States on all non-binding recommendations that specifically call for cooperative federalism.