Finance Commission Division

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The Finance Commission Division of the Department of Expenditure is concerned with the implementation of the recommendations of the Finance Commission. The Eleventh Finance Commission (EFC) was constituted by the President on 3rd July, 1998. The Commission submitted its main report for 2000-05 covering all aspects of its original mandate on 7th July, 2000. The main report along with the explanatory memorandum as to the action taken on the recommendations made by the EFC in its main report was laid on the table of both Houses of Parliament on 27th July, 2000. The Government accepted the recommendations of the Commission regarding devolution of share in Central taxes and duties, grants-in-aid to cover non-Plan gap on revenue account, grants-in-aid for upgradation of standards of administration and specific grants to States for special problems, grants to States for financing local bodies, financing of calamity relief expenditure and debt relief to States. Subsequently the Commission submitted its report on 30th August, 2000 on the additional term of reference relating to monitorable fiscal reforms programme aimed at reduction of revenue deficit of the States. This report alongwith the explanatory memorandum as to the action taken on the recommendations made by the EFC in its supplementary report on the additional term of reference was laid on the table of both Houses of Parliament on 19.12.2000. The recommendations made in the supplementary report of EFC were accepted by the Government. The 12th Finance Commission has also been constituted under the Chairmanship of Shri. C. Rangaraja vide order dated 31.7.2003. The Finance Commission Division provides the status of the implementation of the accepted recommendations of EFC from time to time and any other data on State Finances when required.

DEVOLUTION OF SHARE IN CENTRAL TAXES AND DUTIES:

Under Article 270 of the Constitution, as amended w.e.f. 01.04.1996 by the Constitution (Eightieth Amendment) Act, 2000, a prescribed percentage of the net proceeds of all Central taxes and duties (except Union surcharge, cess levied for specific purposes under any law made by Parliament and the duties and taxes referred to in Article 268 and 269) is to be assigned to the States within which that tax or duty is leviable in that year and distributed among those States in terms of Orders issued by the President on the recommendations of the Finance Commission. For the period of five years commencing from 01.04.2000, the EFC recommended that 28% of the net proceeds of shareable Central taxes/duties may be distributed amongst all such States where the central tax/duty is leviable. If in any year during 2000-05, a Central tax/duty is not leviable in a State, the share of the State in that tax/duty should be put to zero and the entire proceeds should be distributed among the remaining States, by proportionately adjusting their shares. In addition, 1.5% of the net proceeds of shareable Central taxes/duties in a year may be distributed amongst such States which do not levy sales tax on sugar, tobacco and textiles during that year. Necessary Order of the President to implement the recommendation of the EFC has been issued. Consequent upon reorganization of Bihar, Madhya Pradesh and Uttar Pradesh the share recommended by the EFC has been bifurcated between the new States and remaining States and necessary amendment Order of the President has been issued.

GRANTS-IN-AID TO COVER NON-PLAN GAP ON REVENUE ACCOUNT AND INCENTIVE FUND:

The EFC has recommended grants-in-aid amounting to Rs.35359.07 crores to 15 States equal to the amount of deficits assessed for each year during the period 2000-05. The EFC in its supplementary report has recommended that 15% of the revenue deficit grant meant for revenue deficit States during 2000-05 and a matching contribution by Central Government may be credited into an Incentive Fund. The first part of the Fund would comprise 15% of the withheld part of the grants recommended to cover deficit of the States on the non-Plan revenue account and depending on the performance of a State in the implementation of the monitorable programme, the withheld amount may be released to it on a proportionate basis. The second part of the Fund may be created by contribution from the Central Government, equivalent to 15% of the recommended revenue deficit grants. The incentive component has been recommended to be provided to all the States. The amount will be available to a State in proportion to the level of performance in the implementation of the monitorable fiscal programme for each year. The revenue deficit grant recommended for 2003-04 Rs 5744 .91 crores and 85% of this amount is being released to the concerned States.