Finance Commission's new recommendations

The Finance Commission, which makes recommendations on sharing of tax revenues by the Centre and States, has suggested a new path for fiscal prudence in its report submitted to President Pratibha Patil on Wednesday.

"We had been asked to suggest new path for fiscal consolidation. . . we have recommended the fiscal path for the next five years (2010-15)," Finance Commission chairman Vijay Kelkar told reporters at his office.

The government had last year consigned the Fiscal Responsibility and Budget Management (FRBM), the self-imposed fiscal prudence guidelines, to the backburner when it stepped up official spending beyond its means in order to insulate the economy from the global financial meltdown.

Fiscal deficit, a reflection of government borrowings, is estimated to touch 6.8 per cent in 2009-10, up from 6.2 per cent in the previous fiscal, mainly on account of the stimulus measures.

The recommendations of the 13th Finance Commission, Finance Minister Pranab Mukherjee said, "would be getting reflected in the 2010-11 Budget (to be presented in the Lok Sabha in February next year)."

The report, Kelkar said, "Dealt with sharing of tax revenue between centre and states, distribution of funds among states and support to local bodies."

The Finance Commission report assumes significance in view of the ongoing reforms in indirect and direct taxes, which will have a bearing on the tax collections.

The government proposes to introduce the Goods and Services Tax (GST) which will subsume levies like excise, VAT and service tax from April 1, next year.

The Direct Taxes Code, which will replace the Income Tax Act, 1961, is currently in the public domain for debate and suggestions.

As required by the Constitution, the Finance Commission was set up in November 2007 to suggest devolution of tax receipts between the centre and the states.

The government extended the term of the Commission in September 2009 up to January end and requested it to submit the report by December so as to give effect to its suggestions in the Budget.

Besides chairman, other members of the Commission are B K Chaturvedi, Indira Rajaraman, Atul Sarma and Sanjiv Misra. The report, after being adopted by the Cabinet, will be tabled in Parliament.

Currently, states and the Union Territories get Rs 1.64 lakh crore (Rs 1.64 trillion) in a year, or around 30 per cent of the shareable taxes collected by the Centre.

The total tax revenue of the government, which include shareable and non-shareable taxes, has been estimated at Rs 6,41,079 crore (Rs 6,410.79 billion) during 2009-10.

The Twelfth Finance Commission had recommended that 30.5 per cent of the shareable central taxes should be shared among the states and the Union Territories.