Lok Sabha Question No. 54 (STARRED), answered on 2018-07-20
Subject: 15th Finance Commission
Ministry: FINANCE
Asked by: C. N. JAYADEVAN, MUTHAMSETTI SRINIVASA RAO (AVNTHI)

## GOVERNMENT OF INDIA MINISTRY OF FINANCE

## DEPARTMENT OF ECONOMIC AFFAIRS

## LOK SABHA

## STARRED QUESTION NO. 54

## TO BE ANSWERED ON FRIDAY 20 th  JULY, 2018

[29 Ashadha, 1940 (SAKA)]

## '15 th  Finance Commission'

## No. *54, Shri C. N. Jayadevan, Shri Muthamsetti Srinivasa Rao (Avanthi)

Will the MINISTER OF FINANCE be pleased to state:

- (a) whether some states/UTs have jointly written to the Union Government seeking amendments to some of the contentious Terms of Reference (ToR) of the Fifteenth Finance Commission  (15 th FC)  and  if  so,  the  details  thereof  along  with  the  Union  Government's reaction thereon;
- (b) whether a meeting of States' Finance Ministers has been held recently to assess the ToR of the 15 th FC and if so, the details thereof;
- (c) whether ToR of 15 th FC are against the interests of the State Governments and tend to take the States into Central Government's control and if so, the details thereof;
- (d) whether the Centre is moving to cut the Central share of taxes and tweak the tax devolution formula and if so, the details thereof; and
- (e) whether  the States are having apprehension  that they would  be  penalized for the achievements  in  population  control,  health  and  education  secToR  and  if  so,  the  concrete steps taken by the Government to allay their fears?

## ANSWER

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FINANCE MINISTER

A statement is placed on the Table of the House.

(SHRI PIYUSH GOYAL)

## Statement referred to in reply to part (a) to (e) of Lok Sabha Starred Question No. *54 for answer  on  July,  20  2018  raised  by  SHRI  C.N.  JAYADEVAN,  SHRI  MUTHAMSETTI SRINIVASA RAO:

(a) Chief  Minister  of  Puducherry,  Deputy  Chief  Minister  of  NCT  of  Delhi  and  Finance Ministers of four states namely West Bengal, Kerala, Punjab and Andhra Pradesh submitted a joint Memorandum  dated  17 th May,  2018  to the Hon'ble  President of India. In the Memorandum, the following issues have been raised: -

- (i) The Terms of Reference (ToR) of the Fifteenth Finance Commission (XV-FC) violate the federal principle as enshrined in the Constitution, erode autonomy of all States, and bring significant financial hardship to all States and need to be amended as suggested therein.
- (ii) The  Terms  of  Reference  are  qualitatively  different  from  the  Terms  of  Reference  of previous Finance Commissions.  Some of the changes infringe on the provisions of the Constitution,  some others are disruptive  of well-settled federal  fiscal  arrangements  in India and other changes constitute technical errors.
- (iii) The  changes  in  Terms  of  References  will  restrict  the  States  from  fulfilling  their Constitutional  obligations  as  listed  in  the  Seventh  Schedule  and  weaken  cooperative federalism in India.
- (iv) The award of the Fifteenth Finance Commission must apply to Union Territories with legislature, namely, the National Capital Territory (NCT) of Delhi and Union Territory of Puducherry.
- (v) The Commission may be directed to use the population data of 1971 in all cases where population is a factor for determination of the devolution of taxes and duties and grantsin-aid.
- (vi) The  reference  to  the  award  of  the  14 th Finance  Commission  and  imperative  of  the national development programme, including New India-2022, on the Central Government's finances may be deleted.

The government has examined the changes proposed to the ToR through the Memorandum. The apprehensions raised by State Governments regarding violation of the federal principles enshrined in the Constitution are misplaced, because the setting up of FC is itself for facilitating smoother  federal  fiscal  relations.  The  amendment  that  has  been  suggested  to  the  ToR  for inclusion of UTs with legislature is not as per the Constitution of India. The ToR were finalized after inter-ministerial consultations.

(b) No meeting has been held with State Finance Ministers to assess the ToR of XV-FC.

(c) The ToR of XV-FC are not against the interest of the State Governments and do not tend to take the States into Central Government's control.

(d) All  the  issues  dealing  with  central  share  of  taxes  and  devolution  formula  are  being examined  by  the  XV-FC  as  per  its  ToR.  The  Central  Government  will  examine  the recommendations after they are received and the decision made therein will be informed to the Parliament through an 'Explanatory Memorandum as to action taken on the recommendations of the Finance Commission' submitted to the August House.

(e) The memorandum has sought use of 1971 population data by the XV-FC while making its  recommendations.  To  incentivise  performance,  the  ToR  provides  for  the  Commission  to consider  proposing  measurable  performance  based  incentives  for  States,  in  the  areas,  among others, of efforts and progress made in moving towards replacement rate of population growth.

*****

The Government has examined the changes proposed in the memorandum and does not find any constitutional violation in the Terms of References of the Fifteenth Finance Commission since the  Terms  of  References  had  been  finalized  with  due  inter-ministerial  deliberation  including Ministry of Law and Justice.  Moreover, the proposed amendment with regard to inclusion of Union  Territory  with  legislature  requires  constitutional  amendment  which  is  not  possible  to amend at this stage as it involves huge time consuming legislative process. However, during the course of its deliberations the 15 th FC will take the feed-back / opinion of all the States which are main Stakeholders. Hence, the states may discuss the issues while interacting with the Fifteenth Finance Commission.

Further, Government has not held any meeting with State Governments to assess the ToR of  15 th FC.  Further,  the  ToR  of  the  15 th FC  are  neither  against  the  interests  of  the  State Governments not ten to take the States into Central Government's control. Central Government is also not moving to cut the Central Share of taxes and tweak the tax devolution formula. None of the states in the memorandum has indicated any apprehension that they would be penalized for the achievements in population control, health and education secToR.

*****

The tax devolution formula to be followed during a 5 year period is determined by the XVFC  on  the  basis  of  ToR  and  getting  feedback  from  all  the  Stakeholders.  The  role  of  the Central government is limited to 3examine the report submitted by XV-FC and decide, by informing  Parliament  through  an  'Explanatory  Memorandum  as  to  action  taken  on  the recommendations of the Finance Commission' submitted to the august House. The XV-Finance Commission has started functioning. The XV-FC has started the process of having  extensive  deliberations  with  all  stakeholders  before  finalizing  their  report  by  30 th October 2019. It is the views of the Government that this opportunity provided to stakeholder will ensure that nothing is inimical to the interest of the state will included in the report. The apprehension regarding being penalized for population control, health and education secToR will be allayed by the XV- FC during the visits that the XV-FC will be undertaking during the course of its tenure.

Therefore, following amendments were proposed to the Terms of Reference to the XV-FC which are summarized below according to Para number of the Notification:-

| Para 4(iii) :                                                                         | The words 'which are in need of assistance' mentioned in Article 275 of the Constitution may be restored in the appropriate place in the paragraph.                                                              |
|---------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Para 5:                                                                               | The last sentence relating to revenue deficit grants may be deleted.                                                                                                                                             |
| Para 6(i):                                                                            | Delete 'likely to be reached by 2024-25.' Insert the word 'current' after the words 'on the basis of.'                                                                                                           |
| Para 6 (iv): The paragraph containing the reference to the award of the 14 th Finance | Para 6 (iv): The paragraph containing the reference to the award of the 14 th Finance                                                                                                                            |
|                                                                                       | Commission and the reference to the imperative of the national development programme, including New India-2022, on the Central                                                                                   |
|                                                                                       | Government's finances may be deleted.                                                                                                                                                                            |
| Para 6(v):                                                                            | This sub-paragraph may read as follows: 'The impact of the Goods and                                                                                                                                             |
|                                                                                       | Service Tax (GST) on the finances of the Centre and States;'                                                                                                                                                     |
| Para 6(vi):                                                                           | This sub-Paragraph, which refers to conditions that the Government of                                                                                                                                            |
|                                                                                       | India may impose on the States while providing consent under Article 293(3) of the Constitution, may be deleted.                                                                                                 |
| Para 7(i):                                                                            | The reference to the efforts made by the States in the expansion and deepening of tax net under the Goods and Service Tax (GST) may be                                                                           |
|                                                                                       | deleted.                                                                                                                                                                                                         |
| Para 7(ii):                                                                           | The reference to providing incentives to States reaching replacement rate of population growth may be deleted. [The position on the population criterion is in Term of Reference 8.]                             |
| Para 7(iii):                                                                          | Delete reference to flagship schemes of Government of India.                                                                                                                                                     |
| Para 7(iv):                                                                           | Delete this sub-paragraph.                                                                                                                                                                                       |
| Para 7(vi):                                                                           | Delete reference here to direct Benefit Transfers.                                                                                                                                                               |
| Para 7(viii):                                                                         | The reference to control of expenditure on populist measures may be                                                                                                                                              |
| Para 8:                                                                               | deleted.                                                                                                                                                                                                         |
|                                                                                       | This paragraph may be amended to read 'The Commission while making its recommendations, is directed to use the population data of 1971 in cases where population is a factor for determination of the devolution |
|                                                                                       | all of                                                                                                                                                                                                           |
|                                                                                       | taxes and duties and grants-in-aid.'                                                                                                                                                                             |