Fiscal federalism needs a look-in by the 16th Finance Commission

It ll have to deal with some tricky matters such as domain overlaps, externalities and the delegation of funds to lower levels

- SUDIPTO MUNDLE

The Sixteenth Finance Commission (16th FC) is likely to be appointed soon. It is a good time to reflect on some challenging issues of fiscal federalism that the 16th FC may have to face.

First, there is the intersecting domain of the Finance Commission and Goods and Services Tax (GST) Council. The latter’s decisions impact the own tax revenue flows of states and, more importantly, the size of the central tax revenue pool which is to be shared among the central and state governments as per the recommendations of Finance Commissions. Clearly, Finance Commission projections of state and central tax revenues, and recommendations based on them will be impacted by decisions taken by the GST Council. This was a major concern during the 15th FC deliberations when GST revenues were highly volatile, the GST administration was yet to stabilize and the GST Network IT platform was still problematic, especially for the preparation of e-way bills. This greatly exacerbated the challenges the 15th FC was facing in making revenue projections because of the unprecedented contraction of the economy in 2020-21 in the wake of the covid pandemic. Fortunately, most of these problems have been sorted out and GST has now emerged as a large and buoyant source of revenue for both the Centre and states.