Lok Sabha Question No. 4798 (UNSTARRED), answered on 2020-03-23
Subject: Separate Funding Mechanism
Ministry: FINANCE
Asked by: M. K. Raghavan

## GOVERNMENT OF INDIA MINISTRY OF FINANCE

## DEPARTMENT OF ECONOMIC AFFAIRS

## LOK SABHA UNSTARRED QUESTION No. 4798 TO BE ANSWERED ON MONDAY 23 RD  MARCH, 2020 [3 CHAITRA, 1941 (SAKA)]

## 'SEPARATE FUNDING MECHANISM'

## No. 4798. SHRI M. K. RAGHAVAN:

Will the MINISTER OF FINANCE be pleased to state:

- (a) whether  the  Government  is  considering  to  have  a  separate  funding  mechanism  for defence and internal security by widening the scope of the Finance Commission;
- (b) if so, the details thereof and the manner in which the vertical and horizontal imbalances will be addressed;
- (c) whether there has been any apprehension especially among the Southern States that there  is  reduction  in  their  shares  of  tax  revenues  as  recommended  by  the  Finance Commission;
- (d) if so, the details thereof and the manner in which these are being addressed;
- (e) whether the proposed Terms of Reference will reduce the overall tax pool that is shared with States at a time when the States are demanding at least 50 per cent of the revenue collection from the current 42 per cent and if so, the details thereof; and
- (f) whether  the  steps  will  be  taken  to  share  the  revenue  generated  through  cess  and additional excise duty with the State Government and if so, the details thereof and if not, the reasons therefor?

## ANSWER

## THE MINISTER OF STATE IN THE MINISTRY OF FINANCE (SHRI ANURAG SINGH THAKUR)

- (a) In respect of the terms of reference related to a separate funding mechanism (para 9A of the ToR), the Commission has not made any specific recommendation. The Commission has however, indicated, in para 2.34 of its first report pertaining to Financial Year 202021, that. 'The Commission…intends to constitute an expert group comprising representatives of the Ministries of Defence, Home Affairs and Finance to consider the detailed  modalities  and  implementation  plan  for  accretion  to,  and  utilisation  of,  the proposed non-lapsable fund or an alternative mechanism.'
- (b) In respect of para 9A of the ToR, the Commission has made no recommendation having an impact on horizontal or vertical imbalances.
- (c) The  Chief  Minister  of  Karnataka  vide  his  Letter  No  CM/HM/RES/215/2020  dated 6 th February 2020 has written about the reduction in Central Devolution to the State of Karnataka
- (d) The  letter  mentions  inter-alia  that  mainly  on  account  of  the  income  distance  criteria Karnataka's inter se share in the central pool of taxes has declined by 23% from 4.71 under the XIV FC to 3.65 under the Fifteenth Finance Commission. It indicates that the States Revenues have been over-estimated and the expenditure under-stated due to which no revenue deficit grants have been awarded to Karnataka for the year 2020-21. The letter mentions that the Government of India may kindly accept the recommendation of the

Commission to award Special Grants to Karnataka. The issues raised in the above letter relate to the recommendations of the Commission contained in its first report pertaining to  Financial  Year  2020-21  for  which  the  Government  has  already  taken  the  requisite constitutional step. As per the provisions of Art 281 of the Constitution, 'An Explanatory Memorandum as to the Action Taken on the recommendations of the Fifteenth Finance Commission' has been placed in Parliament on 1 st February 2020.

- (e) No recommendation of the Fifteenth Finance Commission in respect of para 9A of its ToR relating to setting up of a separate funding mechanism for defence and internal security is available. Hence, the impact on the overall tax pool that is to be shared with the States cannot be estimated.
- (f) The  determination  of  the  pool  of  taxes  to  be  shared  with  State  Government  is  the prerogative of Finance Commission. The Commission while making its recommendations takes  into  consideration  its  Terms  of  Reference  and  the  various  provisions  of  the Constitution. Art 281 of the Constitution mandates that every recommendation made by the Commission together with an explanatory memorandum as to the action taken thereon is to be laid before each House of Parliament. The Commission in its first report pertaining to FY 2020-21 has not indicated inclusion of cesses and additional duty of excise in the shareable pool.

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