Budget 2020: 15th Finance Commission calls for new legal fiscal framework

Expert panel may be set up to define responsibilities of key stakeholders and standards to be followed at all levels of government

The Fifteenth Finance Commission (15th FC), in its report for 2020-21 has recommended the creation of an overarching legal fiscal framework to improve and overhaul budgeting at the central and state level, as well as provide greater budgetary transparency.

Mirroring the Fiscal Responsibility and Budget Management (FRBM) Act, this would also define the roles and responsibilities of key stakeholders, as well as the budgeting, accounting, internal control and audit standards to be followed at all levels of government, the Commission said on Friday. An expert group may now be set up to draft the legislation.

The recommendation has been a long time in the making. “Financing expenditures through off-budget borrowings and through para-statal entities, both by the Union and State Governments, raises public debt and detracts from compliance with the letter and spirit of the provisions of the FRBM Act, 2003," the report 

Such outstanding extra-budgetary liabilities need to be clearly identified and eliminated in a time-bound manner, with transparent reporting of deficit and debt as provided in the Act, the Commission believes.

The FC has also warned that tax revenue needs to rise fast. The total tax revenue of the central and state governments, which stood at around 17.5 per cent of gross domestic product (GDP) in 2018-19. This is not only far below India's estimated tax capacity but has also broadly remained unchanged since the early 1990s.

"Low tax buoyancy is a persistent concern that needs to be addressed by broadening the tax base and streamlining rates. The Commission has pointed out the need for rationalisation of rates both for Goods and Services Tax, and customs tariffs on industrial goods in line with best international practices.

It has also stressed the need to move towards the implementation of the Direct Tax Code by bringing all the direct taxes under a single code, removing exemptions and broad-basing the slabs. Streamlining the rates and unifying compliance procedures. Parallel steps to increase the capacity and expertise in tax administration at all tiers of government are also long overdue, the N K Singh-led Commission has reminded the government.

At a time when the Centre is hard pressed to wade out of economic stagnation , the FC has pointed out that gross fixed capital formation (GFCF) continues to inhibit economic growth. GFCF refers to the total investment in plant, equipment, machinery and buildings, which declined by about 5 percentage points of India's total Gross Domestic Product between 2011-12 and 2018-19. On the other hand, capital formation by the public sector, relative to GDP, has more or less maintained its levels.

The issue of improving expenditure outcomes and prioritising public outlays has been flagged by several FCs in the past but progress has been slow. The current commission has flagged the government's Ujwal DISCOM Assurance Yojana (UDAY) scheme as a drain on state governments' finances, as it has borne below optimal reduction in power supply losses. Most states are behind in meeting operational targets such as reduction in average technical and commercial losses, it observed

The implementation of GST also continues to be a work in progress, the FC has said, needing many systemic and structural improvements to expand its scope.