The government today finalised the terms of reference for the 12th finance commission that would recommend the distribution of tax revenues between the Centre and states for the period 2005-10.
Finance secretary S Narayan told reporters after a cabinet meeting that the exact terms of reference would be announced only after the presidential assent.
He said the commission would be asked to submit its report by July 31, 2004 to enable the government to prepare the 2005-06 budget taking into account its recommendations.
More From This Section
The commission has therefore a period of one and a half years to finalise its recommendations.
Government sources said since VAT and the issue of division of service tax pool would be decided within this fiscal the issue is not likely to figure in the term of reference of the commission.
Finalisation of the terms of reference of the commission has acquired major importance for the economy, given the precarious nature that the state finances have reached.
The Centre has already worked out a additional relief package for five states in this fiscal of Rs 3150 crore to allay their debt position.
In addition the states and Centre are working out a debt swap formula to retire high cost debts.
Sources said these issues would be incorporated in the deliberations of the 12th finance commission to arrive at a realisitic level of tax ratio.
Apart from the terms of reference specifically laid down in the constitution, the 12th finance commission would also generally review the state of finances of the central and state governments and suggest ways to restructure public finances and restore budgetary balance, Narayan said.
While the finance ministry had suggested that the commission reference should clearly state that the tax devolution to states should not cross 29.5 per cent--the current level, the decision has been left to the discretion of the commission.
The finance commission is a constitutional body which is set up after every five years to recommend a formula for distribution of the net proceeds of taxes between the union and the states, principles which should govern the grants-in-aid of revenues and measures needed to augment the consolidated fund of the states to supplement the resources of the panchayats and municipalities.
Narayan also said the chairman of the body would be announced in the next few days. According to sources, Andhra Pradesh governor C Ranjarajna is expected to take up the position. Its secretary would be former Tariff Commission chairman GC Srivastava.
The initial recommendation of the 11th finance commission was disputed by the relatively better off states which claimed that it rewarded backwardness at the expense of the states which had done well.
Acordingly the President had to make an additional terms of reference to the commission under which it provided an incentive fund for states linked to reduction in their fiscal deficit.