Government May Set Up 16th Finance Commission In 2023 For Centre-State Tax DevolutionFinance Commission is a constitutional body that gives suggestions on Centre-state financial relations
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The government is likely to set up the 16th finance commission this year to suggest, among other things, the ratio in which tax is to be divided between the Centre and states for five years, beginning April 1, 2026, according to a PTI report citing an official aware of the matter.
The official reportedly added that the members of the commission and its Terms of Reference (ToR) are being worked out. The Finance Commission is a constitutional body that gives suggestions on Centre-state financial relations.
The previous Finance Commission submitted its report on November 9, 2020, for the 5 fiscals -- 2021-22 to 2025-26 -- to the President. The commission under NK Singh had kept the tax devolution ratio at 42 per cent -- at the same level suggested by the 14th Commission.
The report further added that the 15th finance commission's recommendations include the fiscal deficit, debt path for the Union and states, and additional borrowing room to states based on performance in power sector reforms. Also, the central government accepted the report of the commission, and accordingly, the states are being given 42% of the divisible tax pool of the Centre during the period 2021-22 to 2025-26.
As per the glide path for fiscal consolidation, the government aims to bring down the fiscal deficit to 4.5% of gross domestic product (GDP) by the 2025-26 fiscal. For the current fiscal, the deficit is projected at 5.9% of GDP, lower than 6.4 per cent in the last fiscal ended March 31, 2023, stated the report.
Commenting on this, Sathvik Vishwanath, co-founder and CEO of Unocoin has shared that, "The GST Council and the Finance Commission have different roles in the tax system of the country. The GST Council determines the tax rates, list of exemptions and threshold for exemption of goods and services, while the Finance Commission recommends that the share of tax revenue be transferred to the states. However, the presence of the GST Council limits the Finance Commission's power to recommend the distribution of taxes between the Center and the states."
According to him, to tackle this issue, the 16th Finance Commission would have to carefully balance its recommendations with the decisions of the GST Council. The commission would have to take into account the decision of the GST Council and recommend that the share of tax revenue be transferred to the states. This would require a collaborative approach between the two bodies to ensure that their recommendations do not impede the effective functioning of the GST Council.
"The establishment of the 16th Finance Commission is a positive development for the Indian economy. However, the concurrent existence of the GST Council creates a new challenge for the commission. The Finance Commission would have to balance its recommendations with the decisions of the GST Council and consider the changing economic environment while making its recommendations. A collaborative approach between the two bodies would be key to ensure a fair and equitable distribution of taxes between the Center and the states," said Sathvik Vishwanath.
