15th Finance Commission likely to pitch for more powers to local bodies

The 15th Finance Commission (15th FC), which is to submit its report in a little over six months, may recommend giving greater financial freedom and powers to panchayats and urban local bodies. For this, it is likely to suggest an increase in property tax rates.

The 15th FC is also likely to bring back performance-based incentives for states, wherein they will be assessed on certain parameters, Business Standard has learnt. Performance-based incentives were recommended by the 13th Finance Commission but omitted by the next one.

In the commission’s meetings with various stakeholders across states, and with economists, there were discussions on providing increased accountability and freedom to panchayats and urban local bodies. Even though this issue is not in the 15th FC’s terms of reference (ToR), it is understood that the report will speak extensively on it, said an official aware of the commission’s work.

To provide greater financial freedom, one of the suggestions could be an increase in property tax rates, which are assessed by local bodies and whose proceeds go to them, the official said. The 15th FC is expected to submit its report by October 30.

Among the ToRs provided to the 15th FC, the panel has been mandated with considering measurable performance-based incentives for states. Some parameters have been opposed by seven state and union territory governments, including how well states implement the flagship schemes of the Central government, and the control — or lack of it — in incurring expenditure on populist measures, progress made through direct benefit transfers and in promoting ease of doing business.

While some of the more controversial parameters like those on populist schemes and implementing the Centre’s schemes may be left out, the 15th FC is likely to advise the Centre to reward states based on other parameters, like effectiveness of capital spending, efforts made by them in deepening the goods and service taxes, progress in increasing revenues and in achieving replacement rate of population growth, and achievements in infrastructure and social sector schemes, said officials aware of the work going on in the commission.

As reported earlier, the 15th FC is likely to play safe on some of the more contentious ToRs, and not factor in some of them while deciding the devolution of the divisible tax pool between the Centre and states.

The only ToRs it is required to act on are those mandated by the Constitution. Namely, to recommend the distribution between the Union and the state governments of the net proceeds of divisible pool of taxes and the allocation between states, the principles which should govern the grants-in-aid of the revenues of the states out of the consolidated fund of India and the measures needed to augment the funds of a state to supplement the resources of panchayats and urban local bodies.

What’s on table

• Recommend raising property taxes
• Bring back performance-based incentives for states
• Give more powers to panchayats and urban local bodies, which is not part of terms of reference