Govt likely to extend 15th Finance Commision's term by six months

The term of the Fifteenth Finance Commission (15th FC) could be extended by around six months, primarily due to uncertainty regarding how to treat any devolution of resources to the newly formed union territories of Jammu and Kashmir (J&K) and Ladakh, Business Standard has learnt. This implies that the 15th FC could submit an interim report before the Union Budget 2020-21 to enable Finance Minister Nirmala Sitharaman and her officials to prepare the Budget. The final report could be submitted at a later date. 

If the Union Cabinet, headed by Prime Minister Narendra Modi, approves the extension, it will be the second one. The deadline for the 15th FC to submit its report was earlier extended to November 30 from October 31, as it was given an additional term of reference to examine if a separate mechanism for funding defence and internal security ought to be set up.

“There has been a lot of discussion between the Finance Commission and the government regarding the distribution of resources. Issues relate to the treatment of J&K as compared to Delhi and Puducherry, and the peculiarity of Ladakh being a huge territory with a very small population,” said a senior official.

While technically union territories don’t get a share of the divisible tax pool and their resources come from the Centre’s share of the divisible pool, the Jammu and Kashmir Reorganization Act mandates the 15th FC to consider the Union Territory of J&K to be paid out of the divisible pool, i.e it should be treated like a state. Ladakh, on the other hand, is expected to get funds out of the Centre’s share, like any other union territory.

Officials say there have been discussions on whether the treatment given to J&K will be unfair to Delhi and Puducherry. These three are the only union territories with legislative assemblies. Moreover, while J&K and Delhi’s police and law enforcement are under the ambit of the central government, Puducherry’s police is under its home department.

Delhi and Puducherry have never got any share of the divisible tax pool outside what the Centre gives them from its share. In an interview with Business Standard, 15th FC Chairman NK Singh had said the Commission was not considering the demands of Delhi and Puducherry to give them a share of the divisible central tax pool in line with other states.

A Finance Commission’s award period runs for a period of five years, as mandated by the Constitution. The 15th FC’s recommendations kick in from April 1, 2020 and run till March 31, 2025. This means that the Budget makers in the finance ministry will need an interim report from the Commission to factor in the next year’s Budget estimates and projections, even if the Commission’s term is extended to beyond the start of the award period.

The Sixth, Eighth, and Eleventh Finance Commissions have all submitted interim reports to help with the Budget process, after which a final report has been submitted. The Eleventh Finance Commission was constituted on July 3, 1998 with the mandate to give its report by December 31, 1999, covering the five-year period 2000-2005. On December 28, 1999, it was given extension till June 30, 2000 with the direction to give an interim report to enable the Budget for 2000-2001. The extension was given to accommodate the then new states of Jharkhand, Uttarakhand and Chhattisgarh, all of which came into existence in November 2000.