14 Finance Commission

th

1.Indian Polity M.Laxmikanth Ch.41

2.Survey vol1, chapter10
3.14th FC report Vol1

Dr. Y.V. Reddy

Chairman, Ex-RBI gov.

1. Prof. Abhijit Sen

(Part Time)

Ex-Planning Commission member

2. Ms. Sushama
Nath

Ex-Finance Secretary

3. Dr. M. Govinda
Rao

Director, National Institute for Public

Finance and Policy, New Delhi

4. Dr. Sudipto
Mundle

Ex-Acting chief of National Statistical

Commission

Secretary

Ajay Narayan Jha, IAS

Formed

2013, Jan

Report

2014, Dec.

Implementation

1st April 2015 to 31st March 2021

FC-280
Membershi
p

Function

14th FC: report

1.Tax
devolution
2.PRI-SFC
3.Grant-inAid
4.Others

14th FC=> other matters referred by President

Public utility Pricing

4.Others

Fiscal deficit review

Disinvestment
Disaster Management
GST
Polavaram
Climate
/Sus.Development

14 FC
Report
th

1.Tax
devolution
2.PRI-SFC
3.Grant-inAid
4.Others

Vertical
(42%)
Horizontal

Total transfer to States

FC
Tax
Devolution
#280
Grant-inAid
#275

PC/FinMin
CSS funds
State
Plan
grants
Implementin
g Agencies
(2014)

Total Transfer to States

This should
be majority

FC; 48% PC; 52%

Total Transfer to States

States
hv
2
FC; 48% PC; 52%
Formula based,
contribute
unconditional
90:10, 75:25 etc.
transfer
One-size fits all

FC

FC: Transfer to States

Tax
Devolution
#280
Grant-in-Aid
#275

Verticle
(42%)
Horizontal

268- levied by union but collected & kept by States

1. Stamp duty- cheque, prom-notes,

insurance policy, share transfer
2. Excise duty on medical and toiletry
prep. With alcohol / narcotics.
3. Dont go to consolidated fund of
India

269: levied, collected by union but assigned to states

Inter state commerce

Central sales tax (CST)
Belongs to exporter state.
Income Shown as -- in the Annual
financial statement (budget)

FC: share yes

1.
2.
3.
4.
5.
6.
7.

Corporation Tax
Income Tax
Excise duty
Service Tax
Customs duty
STT
Wealth Tax

No
FC Share:
1. Art.
268 (Stamp
+
Deo)
2. Art. 268-A: service
tax-yes but not
with J&K
3. Art. 269 (CST /
Ebay)
4. Art. 270 (Cess)
5. Art. 271

FC

FC: Transfer to States

Tax
Devolution
#280
Grant-in-Aid
#275

Verticle
(42%)
Horizontal

divisible Tax devolution (All central taxes*)

Pool
Cess, 270
12th Ranga:
Surcharge,
30.5%
271
13th Kelkar:
268, 269
32%
Service-J&K
14th Reddy:
42%

Union

State

State

Since Cess and Surcharge not included

divisible Tax devolution (All central taxes*)

Pool
Cess, 270
12th Ranga:
Surcharge,
30.5%
271
13th Kelkar:
268, 269
32%
Service-J&K
14th Reddy:
42%

Union

State

Horizontal?

State

Horizontal distribution

Population Census
1971

Demo.Change
Census 2011

Both must be considered,

else:
1. Family planning

1.
2.
3.
4.
5.

Horizontal
Fiscal
Per capita GSDP compared to
capacity
best states
income
Such as Goa, Sikkim,Haryana
distance
Further distance=more
money allotted
progressive horizontal
devolution
To check against income and
regional imbalance

Horizontal distribution: 5 variables

Population
Census
1971

Demo.Chan
ge Census
2011

IncomeDistance

Area

Opportunity
cost
Forest-Cover

Population; 18%

Area; 15%
Forest-Cover; 8%

Demographic-Change; 10%
Income-Distance; 50%

Horizontal distribution: 13th vs 14th

Weights accorded
13th
14th
Population (1971)
Population (2011)

25
0

17.5
10

Horizontal distribution: 13th vs 14th

Weights accorded
13th
14th
Population (1971)
Population (2011)
Fiscal capacity
Income distance
Area

25
0

17.5
10

47.5

50

10

15

Horizontal distribution: 13th vs 14th

Weights accorded
13th
14th
Population (1971)
Population (2011)
Fiscal capacity
Income distance
Area
Forest Cover
Fiscal discipline

25
0

17.5
10

47.5

50

10
0
17.5

15
7.5
0

Find correct answer?

In horizontal tax
devolution formula,
the 14th FC, has
A.
included ___ as new
B.
variables?
C.
1. Census 1971 Only 2
2. Census-2011 and 3D.
new
3. Forest cover
4. Fiscal discipline

Only 1, 2 and 3
Only 2 and 3
Only 1 and 3
All of them

Horizontal distribution

1. Another table for service tax.

Because J&K outside service tax regime.
2. Vol1, ch10- how much gain/loss to
your state? (interview)

Started with 5th FC

Given additional central
grants and tax breaks.

14th FC
Special vs
general
category

reasons

1.hilly and difficult

terrain
2.Population density
low
3.tribal population
high
4.strategic border
location
5.Eco. and
infrastructure

Special cat.
States
1.Assam*
2.Nagaland*
3.J&K*
4.Arunanchal
Pradesh
5.Himachal
Pradesh
6.Manipur
7.Meghalaya
8.Mizoram
9.Sikkim
10.Tripura
11.Uttarakhan
d

States
Special
category
(*) from 5th
FC
14th FC no
addl. Sops
Top gainerslosers

1. Not 42%, give only 38%

2. Else less money left for
unions own plans and
schemes.
3. Union will be forced to cut
down
4. MNREGA, NFSA, RTE: cant
cut.
5. So, BRGF scraped. Bihar,
Odisha etc. to suffer.

Criticism
Prof. Abhijit
Sen

1. RKVY (Krishi Vikas) budget

halved.
2. So, In absolute figures, Bihar
& Odisha et al will get less
before.
3. Will their state Governments
increase funds for backward
region and agri. From own
budget?

Criticism
Prof. Abhijit
Sen

Total transfers from union to state

FC: 32Plan
>42%
by 1.34
1.41
lakh
lakh crore

1. 2014: 7.4 lakh crores

2. 2015: 7.6 lakh crores
3. =hardly 4% increased.

Total
transfer:
plan + non
plan

Verticle Tax devolution just

38% and not 42%
Continue Plan transfer as per
Gadgil-Mukhrjee formula
Until Niti Ayog picture is clear.
wrote Dissent note, but
Government accepted majority
view of FC (42%)

recommen
ds
Prof. Abhijit
Sen

1. 14th FC has delivered a

strong push towards true
federalism. Do you agree?
Justify your stand.
2. Pro: untied funds (42%)
3. Anti: Sen- what about
backward states? + faults in
horizontal formula

Question
Mains
Interview

th

14 FC
Report

Vertical
(42%)
1.Tax
devolution

Horizontal

2.PRI-SFC

Abhi
Criticism

3.Grant-inAid
4.Others

1. Lack of money
2. Cant provide basic
amnesties- water, waste
Management, street lights
etc.
3. Cant hire large specialized
staff
4. IT-infrastructure, building
repair etc. difficult

Local
bodies
Problem
areas

1. 73 Amendment 1992
2. Form State finance
commissions in a year, and
thereafter @5 years
3. But not done at regular
interval. Hard to sync. data
for FC.
4. SFC-report not all
implemented.
5. Some implemented but not
rd

Local
bodies
Problem
areas
SFC

14 FC Report
th

1.Tax
devolution
2.PRI-SFC
3.Grant-inAid
4.Others

Grant in Aid
Other
reforms

 Vertical
Horizontal
Rural vs
urban

Other measures

Grant-in-Aid

14th FC: helping the local bodies

Tax-reforms
North East
Muni.bonds

Grant in Aid
To
tal
2.8
La 7
kh

Union
State

10th FC was
first to
recommend

State

2.8
cr. 7 La
kh

Grant in Aid

Unio
n
Stat
e

Stat
e

90% Population (2011) + 10%

Rura
Urb
Area

2 lakh Cr.

an

87,000 cr

14th FC: Grant in Aid for Local Bodies

Union

2.8
cr. 7 La
kh

State

State

90% Population (2011)Urban

+ 10%
Area

Rural

90% basic

2 lakh Cr.

10%
Performa
nce

80% basic

87,000 cr

20%
Performa
nce

 Vertical
Horizontal
Rural vs
urban

Other measures

Grant-in-Aid

14th FC: helping the local bodies

Tax-reforms
North East
Muni.bonds

PRI
funding
States should Share mining royalty
Property tax and advertisement
State Tax
tax
Devolution
Entertainment tax: cable, net-caf,
boat rides
Professional Tax: 2500 => 12,000
(Art. 276 amendment needed)
Kerala, TN local bodies get
professional tax.

Increase property tax as per

inflation & Development
Assessment every 4-5 years.
Stringent action on evasion

PRI
Property
Tax

Art. 285(1): union properties

cant be taxed by state / local
body
Previous FC recommended
they should be taxed
14th FC: at least compensate
local bodies

PRI funding
Union
properties

Part 9 and 9-A dont apply to

Assam, Meghalaya, Tripura,
Manipur (AMTM)
So, FC PRI-reforms not valid
for them
Expand 275(1) to fix this
lacuna

Local
bodies
North East

 Vertical
Horizontal
Rural vs
urban

Other measures

Grant-in-Aid

14th FC: helping the local bodies

Tax-reforms
North East
Muni.bonds

1. Large Corp. help them

directly launch muni. bonds
2. Small municipalities: setup
intermediary to help them
issue bonds.
3. SEBI norms: L2_P1_Capital
Market.pptx

PRI
Muni
Bonds

Other measures

Property

Mining

Profession
al

Northeast

Entertainm
ent

Muni.Bond
s

SFC
reports

Mains questions

1. 14th FC has taken extra precautions

to ensure local bodies are not left at
the mercy of state government.
Elaborate.
2. Even after a decade of 73rd & 74th
Amendment, PRI bodies have not
become a strong and vibrant unit of
Government, due to lack of financial
resources.
Examine
reasons and 3.
1. Skip
2. Attempt

14 FC Report
th

1.Tax
devolution
2.PRI-SFC
3.Grant-in-Aid
4.Others

PRI
Disaster
Management
Post
devolution
revenue
deficit

14 FC: Disaster
Management
th

1.Existing mechanism
2.Problems and solutions

Funds: National Disaster Management Act 2005

NCCF
merged in
this

Respon
se

Mitigati
on

Natio
nal

Natio
nal

State

State

Distric
t

Distric
t

Not all
states
have
formed

1. NCCF (calamity and

contingency fund) merged
into this (13th FC)
2. Money from cess on customexcise, but what after GST?
3. Design new arrangement to
get money in this fund
4. Give tax exemption to
private donors
5. Encourage CSR funding into

NDRF
Problem
areas

Cyclones landslides
droughts avalanches
earthquake
cloud
s
bursts
fires
pest
floods
attacks
tsunamis
cold
Hailstorms waves*

NDRF
Present list
Limited
* newly
added

Expand the list of "official

calamities" for state-specific
disasters:
1. Heat waves
2. coastal erosion
3. bamboo flowering
4. Snakebites
5. Monkey and elephant attacks

NDRF
Calamity
list

Funds: National Disaster Management Act 2005

1.New
mechanism for
funding
2.Expand the list

Respon
se
Natio
nal
State
Distric
t

1. 275(1): Union grants money

2. So far: 75-25 (General) / 9010 (Special)
3. 14th FC: 90-10 all
4. Hazard risk vulnerability
index: More vulnerable states
get bigger allotment
(inflation, labor cost)
5. Total Rs.61,000 SDRFs

SDRF
14th FC
recommen
ds

Funds: National Disaster Management Act 2005

1.New
mechanism for
funding
2.Expand
the
list
1.90:10 rule
2.Hazard vul.
Index
Make noncompulsory

Respon
se
Natio
nal
State
Distric
t

National

State / District

Questions on disasters

MCQ: Who gives money in SDRF? How

much
MCQ: How many funds provided in
NDMA?
MCQ: List of official calamities.
Mains: Discuss in brief, the constrains
in disaster response funding in India,
and list the remedies suggested by
1. Skip
2. Attempt
3.
14FC.

2.PRI-SFC

th

14 FC
Report

1.Tax
devolution

3.Grant-in-Aid
4.Others

Sector specific stopped,

because large $$

PRI
Disaster
Management
Post
devolution
revenue
deficit
Sector
Specific

14th FC
Report

1.Tax
devolution
2.PRI-SFC

Coop. Fed

3.Grant-inAid

Public Utility

4.Others

PSE
Fiscal
Consolidation
GST

1. Social sector spending:

1. FC: outside purview
2. PC/Niti: state Government
participation?
2. Better use Inter-State
councils (Art. 263)
3. Identify sectors, design
schemes, distribution-criteria
4. +focus on NE + environment

14th FC
Cooperativ
e
federalism

14th FC
Report

1.Tax
devolution
2.PRI-SFC

Coop. Fed

3.Grant-inAid

Public Utility

4.Others

PSE
Fiscal
Consolidation
GST

1. Punish states delaying

electricity subsidies to
companies
2. State electricity regulatory
commissions Fund (SERC)
3. Rail tariff authority: give
statutory status (amend Rai
act 89)
4. Independent regulator for
road sector

14th FC
Public
Utility
Pricing

1. WRA- water regulatory

authorities for drinking,
irrigation and industrial
2. Install water meters
@customers expense
3. Environment helpedyes

14th FC
Public
Utility
Pricing

14th FC
Report

1.Tax
devolution
2.PRI-SFC

Coop. Fed

3.Grant-inAid

Public Utility

4.Others

PSE

Remaining 3 in
Separate lectures
on relevant topics

Fiscal
Consolidation
GST