Low tax mop-up to be compensated: Panel

States with high revenue deficit stand to benefit.

States with high revenue deficits, like West Bengal, Uttar Pradesh, Gujarat and Maharashtra, are likely to benefit most from the recommendations of the Twelfth Finance Commission, if they are accepted by the government.

In its 500-page report, the commission has recommended a double-digit increase in the revenue deficit grants going to states.

On the other hand, states like Chhattisgarh, Madhya Pradesh and Haryana, which have low revenue deficits, are expected to lose out.

The Eleventh Finance Commission had recommended a total of Rs 58,587 crore as grants to states in the period between 2000 and 2005.

The Twelfth Finance Commission, the recommendations of which cover the 2005-10 period, has also recommended that a total of 30.5 per cent of the divisible pool of central taxes should go to states. Of this, 29.5 per cent will be the share from the divisible pool and 1 per cent will be to offset the impact of the additional excise duty on certain items. The Eleventh Finance Commission had suggested that states get 28 per cent of the divisible pool of taxes with an extra 1.5 per cent to offset the impact of the additional excise duty on sugar, tobacco and textiles. These items are not subject to state sales tax.

The total transfer to states has been hiked to 38 per cent from 35 per cent in the Eleventh Finance Commission. This includes grants for calamity relief and local bodies, besides those for revenue deficit.

While increasing the grant proportion, the Twelfth Finance Commission had ensured that economically backward states got a higher share of the central pool of funds for their development, C Rangarajan, chairman of the commission, said after submitting the report to President APJ Abdul Kalam today.

The commission has also recommended a separate distribution process for service tax proceeds. While the share of various states of service tax is broadly similar to their share in the divisible pool, Jammu & Kashmir has not been included in this list as there is no service tax in the state.

Rangarajan said the service tax was, at present, part of the divisible pool. Though Parliament has passed a constitutional amendment allowing only the Centre to levy the tax and both federal and state-level collection and apportioning of the levy, it has not yet been implemented.

"We have addressed all the issues mentioned in the terms of reference "" tax devolution, grants, debt relief, flow of funds to urban and local bodies and calamity relief," Rangarajan said.

The panel had "tilted" the balance towards grants to benefit smaller and less-developed states, which receive a smaller share of the tax revenue. At the same time, complaints by better performing states of receiving a relatively lower share of revenue had also been addressed, Rangarajan said.

The Twelfth Finance Commission has set milestones for both the Centre and states in terms of restructuring their finances.

"There is a separate chapter on restructuring of public finances of both the Centre and states," Rangarajan added. The report has devoted a separate section to the mechanism for release of Finance Commission rewards from the Centre to states.

The Twelfth Finance Commission was slated to submit its report in July this year, but its tenure was extended till December due to the elections. This was to allow it to take the views of the United Progressive Alliance government, which came to power in May 2004.