Cabinet approves setting up of 15th finance panel

The Cabinet has approved the setting up of the 15th Finance Commission (FFC), which will recommend ways to distribute funds between the Centre and states.

Finance Minister Arun Jaitley said the members of the commission and its terms of reference would be notified in due course. Recommendations would have to be in place before April 1, 2020, he said. Normally, it takes two years for the finance panel to give its recommendations.

The main terms of reference of the panel are mandated by Article 280 of the Constitution. The FFC might be tasked with suggesting ways to provide more fiscal space and resources for states to deal with agricultural and other economic crises. Former parliamentarian, revenue and expenditure secretary N K Singh might be chairman of the FFC.

This time, the FFC would have to consider the impact of the goods and services tax, which kicked in from July, on the resources of the Center and states. The FFC might also be tasked with recommending the debt-gross state domestic product (GSDP) levels of each state and the combined debt-gross domestic product (GDP) levels for all states.  Just like the Fiscal Responsibility and Budget Management panel had suggested a road map for the Centre to reduce its debt-GDP ratio to 40 per cent by FY2023, the FFC might recommend a road map for states, sources told Business Standard. The recommendations of the FFC would be applicable from FY20-25. There was also a major debate going on among government officials on whether the FFC should use the 2011 Census for its work.

The 1971 Census was used till the 14th FC, though it recommended distribution of grant to states for local bodies using the 2011 Census.

The Finance Commission is set up every five years to suggest rules that govern the distribution of tax proceeds among the Centre, states and local administrative bodies. The Fourteenth Finance Commission was headed by former Reserve Bank of India governor Y V Reddy. It had recommended the devolution of an unprecedented 42 per cent of the divisible pool to states during 2015-16 to 2019-20, against 32 per cent suggested by the previous commission.

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