Address disquiet among the states

The 16th Finance Commission must look at inequalities and provide fiscal solutions

- S Mahendra Dev

The appointment of the 16th Finance Commission (FC) is expected shortly. The global and domestic challenges are different now as compared to 2017 when the 15th Commission was set up. The 16th Commission will have to take into account the Covid-19-induced fiscal shocks and global macroeconomic uncertainty including geopolitical challenges: The combined (Centre and states) fiscal deficit and debt were 10% and 89% respectively in 2022-23.

The Finance Commission determines the vertical shares-how much of the Centre's tax revenue should be given away to states- and horizontal shares how to distribute that among states. The 14th Commission had raised the shares of states from 32% to 42% of the divisible pool of Union taxes while the 15th Commission recommended 41% when the number of states was reduced to 28. It looks like there is no scope for increasing this share as there are fiscal imbalances for the Centre with a 6.5% fiscal deficit and 58% debt in 2022-23.

However, the 16th Finance Commission should look into the issue of cesses and surcharges, which increased from around 10% of gross tax revenue (GTR) in 2011-12 to 20% in 2019-20. In fact, the ratio of states in the Centre's GTR declined from 36.6% in 2018-19 to 30.2% in 2022-23. Rangarajan and Srivastava had suggested an upper limit of 10% GTR for cesses and surcharges.

The Commission could recommend this. The share of states in Union taxes can be raised if it exceeds 10%. In other words, vertical share can be made dynamic depending on the share of cesses and surcharges. GSDP are the highest for the data given in the report of the 15th Commission. Therefore, the 16th Commission has to consider these widening disparities in income at the state level.