But the 1.5 percentage point increase is unlikely to impose a burden on the Centre.
States are set to get 32 per cent in central taxes over the next five years (April 2010 to March 2015), as against 30.5 per cent at present.
“The recommended increase in the share of states in net central proceeds is unlikely to impose a burden on the Centre and can be accommodated by pruning and better targeting of subsidies as well as through the restructuring of some of the centrally-sponsored schemes,” the Commission said in its report that was made public on Thursday.
While recommending a higher devolution, the constitutional body has also raised the ceiling on all revenue account transfers to 39.5 per cent of the Centre’s gross tax revenue, as against 37.5 per cent recommended by the previous Finance Commission.
The commission also asked the Centre to review the cesses and surcharges levied by it to reduce their share in the gross tax revenue. The cess and surcharge are not part of the divisible pool and states have been complaining that they lose out. “We hope that with the introduction of goods and services tax (GST), most of the cesses and surcharges will be subsumed under the basic rate of central GST,” the Commission said.
Like its predecessor, the Thirteenth Finance Commission, which was headed by Vijay Kelkar, has retained the weights assigned to population (25 per cent) and area (10 per cent). But the weight for fiscal discipline has been increased to 17.5 per cent. The Twelfth Finance Commission had assigned 7.5 per cent to fiscal discipline and equal weight was given to tax effort, which has been subsumed into fiscal discipline this time.
Also, the Thirteenth Finance Commission has introduced a new criterion for arriving at the devolution formula — fiscal capacity distance — that has the maximum weight of 47.5 per cent. The conventional tax-to-gross state domestic product (GSDP) formula has been rejected, as the constitutional body was of the opinion that with no tax on agricultural income, the ratio was distorted. So, it calculated fiscal distance by estimating the distance of a state’s per capita revenue from that of Haryana, which ranks second in the per capital income rankings.
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“Our recommendations on tax devolution are based on the considerations of need, fiscal deficiency and adequate incentivisation,” the Thirteenth Finance Commission report said. The award will result in the share of tax devolution in total transfer to states rise to 84.85 per cent, from 81.1 per cent suggested by the earlier commission.
The recommendation of the Thirteenth Finance Commission, which is binding on the Centre, will result in a devolution of over Rs 14.48 lakh crore over the next five years, which is 2.36 times the amount that the states will receive as share of taxes between April 2005 and March 2010.