Ever studied a finance commission report? Unlikely. It's one of the many government documents whose relevance is inversely proportional to their readability. Before February 25 this year, 12 finance commission reports have been presented, each as obscure as the other, from a layman's perspective. The Thirteenth Finance Commission (TFC) report, presented in Parliament on February 25, (BT had run exclusive excerpts in January) makes a big departure from the past. In its relevance, it's way higher than any of its predecessors (it had a broader mandate too) and is more like an agenda for an overhaul of public finances at the Centre, states and the local bodies. Actually, it's not just an agenda. It's an action plan that is doable and desirable, all told in a manner that is more engaging than most government documents.
|The states with top 5 per cent share in all shareable tax.|
|STATE||SHARE OF ALL SHAREABLE TAXES EXCLUDING SERVICE TAX (per cent)||SHARE OF SERVICE TAX|
Source: 13th Finance Commission
The TFC, headed by one of India's best minds on public policy, Vijay Kelkar, was given a wider mandate than usual finance commissions, set up under the Constitution to decide how tax revenues are to be shared between the Centre and the states and among the states. Kelkar's report is a blue print for a new economic order and covers reform of public expenditure, taxes, environment management and delivery mechanism of public service. Through his budget proposals (see story on page 40), Finance Minister Pranab Mukherjee has already incorporated some of the TFC's proposals, which are key to achieving fiscal correction and a 10 per cent-plus GDP growth.
We analyse the six distinct hats that the TFC seems to have worn and what it said in each of these roles:
1. TFC as Tax Reforms Commission
The Goods and Services Tax (GST) is such an ambitious tax reform that everybody wants to have it, but nobody knows how to design it in a feasible manner. So the TFC designed a model GST-complete with a "Grand Bargain" that is meant to sweeten the deal for the states not willing to take the GST bait easily (See Making GST a Good and Satisfactory Tax for All). Among the TFC's other tax proposals are one to curb the number of cesses-a subterfuge for tax that the Union government had of late been resorting to rather frequently. Reduced dependence on cesses and surcharges along with full disclosures in finance accounts on the collections are amongst the TFC's key non-GST tax policy clean-up measures.
2. TFC as Expenditure Reforms Commission
For every bureaucrat on its rolls the government maintains 20 clerks and about 10 drivers. The productivity levels of this huge staff remain highly obscure in the case of state governments, though the picture isn't all that much better at the Centre. Without taking the dreaded word 'downsizing', the TFC has proposed a novel way of dealing with ballooning government expenditure on its forever expanding unproductive workforce. It has asked state governments to file full data on employees at each level with commitment on salary. While states will find it hard to fight this disclosure, it will make the employees shape up. Other significant recommendations include demystifying the massive doses of public expenditure in the rural economy by asking the states to reveal actual expenditures for panchayats and urban local bodies under the same heads as used in the Budget in their annual financial statement by March 31, 2012.
3. TFC as PSU Reforms Commission
Indian government doesn't run enough quality schools complete with working labs and trained teachers for its children, but it maintains aircraft and swanky buildings under public sector undertakings, many of which are chronically loss-making. The UPA's aam admi slogan notwithstanding, the government's asset portfolio-if it had bothered to prepare one-is likely to show lop-sided priorities. The TFC's solution: maintain a systematic record of all PSU landholdings, list those yielding returns on assets lower than a norm and close nonworking PSUs by 2011. Strategise to divest stakes/privatise others.
4.TFC as Fiscal Corrector
Before it slaps a fresh tax, if the government were to tell taxpayers what it would cost them to comply with levies like, say, the now abolished Fringe Benefit Tax, these taxes would never see the light of the day. Compliance cost disclosures is a key fiscalrectitude recommendation. Others include a suggestion to reduce the combined debt of the Centre and states to 68% of GDP and move to a revenue-surplus position by 2014-15. The TFC has asked the government to convert its Medium Term Fiscal Plan to a statement of commitment, not intent, and integrate it with the annual Budget exercise. It also recommends setting up of an independent review mechanism to evaluate the fiscal reform process and giving it legislative backing in time.
5. TFC as Outcome Pusher
A prime example of how the TFC has built both responsibility and penalty for nondelivery into the system is the power of "deemed deductions" it has given to states. States can deduct from grants for local bodies sums they ought be collecting as user charges for delivery of public service. Since local bodies will find it tough to get the users to cough up the user charges unless they effectively deliver the services, outlays would have been converted into outcomes. The TFC has also declared grants of Rs 1 crore for district innovation funds to increase efficiency of public service.
6. Divider of Taxes Between Centre and States
Of course, this is every finance commission's first and foremost role. The TFC has recommended that states' share of shareable tax revenues rise to 32 per cent, up from 30.5 per cent in the past. Recognising the local bodies' increasing need for funds to deliver public services, the TFC has given them shares in the state's income from royalties. Since states found it tough to borrow from the RBI and the markets to raise resources to deal with the macroeconomic shock of the global downturn despite relaxed borrowing limits, it has asked the Centre to borrow and devolve the resources in line with the finance commission's formula for that year.
Taxes to be subsumed in GST.