15th Finance Commission Chairman NK Singh on Monday called for setting up a Fiscal Council like institution to better manage the debt trajectory of the Centre and states.
He also highlighted the "substantial" increase in the proportion of cess and surcharge in Gross Tax Revenue (GTR) in the past 10 years, saying only if a Constitutional amendment is introduced to include a portion of it into the divisible pool, then states' could get a share of the revenue earned under that head.
Speaking about the fiscal challenges, Singh said apart from the issue of consolidated roadmap or debt trajectory, two other issues continue to be dominant in the fiscal space.
These are "lack of a fiscal institution in India by way of Fiscal Council or any other institution. Fact that we are one of those countries which have some kind of fiscal architecture, but does not have independent fiscal institutions is a factor that needs to be kept in mind".
The second issue is since the world in general, investors and rating agencies focus not only on the debt trajectory of the central government but of the general government (centre and states together), there is a need for an institutional framework, which will cover both these as partners.
On the issue of cess and surcharge, Singh said the proportion of cess and surcharge in 2010-11 was 10.4 per cent of GTR. It increased to 19.9 per cent in BE of 2020-21. If we take out the 3 percentage points of GST compensation cess, then 10.4 per cent has gone up substantially to 16.5 per cent.
"I see no viable solution except a Constitutional amendment. If that Constitutional amendment is introduced, recognising some proportion of Cess and surcharge ... to the divisible pool, it will certainly allow greater flexibility to the successive Finance Commissions subsequently to be able to calibrate a framework," he added.
He also said that it should not be the situation that the finance commission raises the devolution to the states and then the Centre increases cess and surcharge, thereby neutralising the impact of higher devolution. Cess and surchage do not form part of the divisible pool of tax revenue that goes to the states.
"It should not be a cat and mouse game that every finance commission raises the devolution number and it then neutralised simultaneously by an increase in cess and surcharge leaving the states where they were, nor the opposite way. I think fiscal federalism needs greater continuity and must be embedded in greater trust. The behaviour of this will be a touchstone for reinforcing the broad parameters of federal trust," Singh added.
The 15th Finance Commission has recommended that the states be given 41 per cent of the divisible tax pool of the Centre during 2021-22 to 2025-26, which is at the same level as was recommended by the 14th Finance Commission. Finance Commission is a constitutional body that gives suggestions on Centre-state financial relations.
As per the Commission, the GTR for the 5-year period is expected to be Rs 135.2 lakh crore. Out of that, the divisible pool (after deducting cesses and surcharges and cost of collection) is estimated to be Rs 103 lakh crore. States' share at 41 per cent of the divisible pool comes to 42.2 lakh crore for the 2021-26 period.
The report of the 15th Finance Commission was tabled in Parliament on February 2.
Singh also said that a "working relationship" between Finance Commission and GST Council would have to be worked out as both are constitutional entities.
GST Council is responsible for indirect taxation and Finance Commission suggests a Revenue Deficit grant for states.
"So, the working of the Finance Commission is integrally related to the decision-making process of the GST Council," he said.