The Public Policy Research Institute (PPRI), a think tank under the State Finance Department, has suggested that the 16th Finance Commission revisit the criteria used for tax devolution to States and recommend the creation of an independent and permanent council for handling matters related to fiscal decentralisation.
The suggestions form part of a set of recommendations prepared by PPRI ahead of the 16th Finance Commission’s visit to Kerala in December.
An independent fiscal council is useful, among other things, as a grievance redressal mechanism for States and as an advisory body for settling disputes arising out of fiscal policies and performance, according to the PPRI.
“The Central Finance Commission ceases to exist after the submission of its report to the President of India. There is no Constitutional provision to redress the grievances of the States and the Union Territories on the concerns flagged during the course of implementation of the Finance Commission recommendations,” PPRI, which is headed by Mohanakumar S., a former director of the Institute of Development Studies, Jaipur, noted.
Kerala perspective
From the Kerala perspective, PPRI suggests that the horizontal devolution criteria be restructured to guarantee a fair distribution of resources. PPRI wants the income distance criterion, which carries 45% weight, to be split into seven components, namely per capita income (15%), and 5% each to higher education enrollment ratio, ratio of higher education enrollment among scheduled castes and scheduled tribes, performance in health indicators, rural connectivity, weightage to elderly population, and weightage to migrant workers in Kerala and Keralite migrant workers employed abroad.
Under the 15th Finance Commission, the criteria and weight in percentage were as follows: population and area 15% each, forest and ecology 10%, income distance 45%, tax and fiscal efforts 2.5%, and demographic performance 12.5%.
Per capita income is not necessarily a good measure of assessing tax capacity, PPRI said. States with a higher per capita income like Kerala are confronted with second-generation issues associated with economic and social development. For such states, the per capita spending on education, health, infrastructure development, social security and care for the elderly tend to be higher.
Population criterion
On population criterion, PPRI urged the Finance Commission to consider the composition of population by age and destination-migration for the award of devolution.
“Population is not a homogenous entity and its specific characteristics have to be considered,” it said. Similarly, the ‘area’ criterion should consider land characteristics such as gross cropped area, net cropped area and cropping intensity, rather than the total geographical area. Uncultivable or barren land does not attract much expenditure from the state exchequer. In the case of Kerala, out of the 38852 sq km area, barren and uncultivable land constituted only 3.2% in 2021-22, PPRI said.
Cesses and surcharges collected by the Centre, a contentious issue, should be capped at a “consensus level” so that anything beyond it flows to the divisible pool, PPRI suggested. These levies are not shared with the States, and their percentage to the gross tax revenue rose from 12.8% in 2011 to 22.8% in 2022-23, drawing flak from States including Kerala. “A higher reliance on the non-tax revenue, cesses and surcharges by the Union government weaken the federal structure and work in favour of centralisation,” PPRI said.
The recommendations also urge the FC to adequately compensate local governments for the loss in own tax collection after the introduction of the Goods and Services Tax (GST).
Published - November 21, 2024 06:00 pm IST
