Finance panel suggests 150 bps hike in states tax share

The Thirteenth Finance Commission,whose report will be tabled in Parliament along with the Economic Survey 2009-10 on Thursday...

The Thirteenth Finance Commission (TFC),whose report will be tabled in Parliament along with the Economic Survey 2009-10 on Thursday,has recommended a 1.5 percentage points increase in states share in the divisible pool of taxes to 32% from the existing level.

Chaired by Vijay Kelkar,TFC has also suggested raising the indicative limit of overall transfers to states out of the gross revenue receipts of the Centre to 39.5% from current level of 38%,again increase of 1.5 percentage points.

The extent of increase in states revenue share suggested by TFC is much higher when compared with the submission of the Twelfth Finance Commission headed by C Rangarajan,who now chairs the Prime Ministers Economic Advisory Council. The Rangarajan panel had suggested raising states share of taxes to 30.5% from 29.5%,and the limit on overall transfers to 38% from 37.5%.

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The government will table the TFC report in Parliament on Feb 25 along with an action taken report in both Houses of Parliament. The Commissions suggestions would cover the five-year period starting April 1,2010.

A finance commission is set up under Article 280 of the Constitution to advise the government on sharing revenues between the Centre and states,as well as on a number of other fiscal issues. TFC would suggest a five-year roadmap on fiscal consolidation to pare the 16-year-high fiscal deficit projected at 6.8% of GDP in 2009-10. Finance minister Pranab Mukherjee,who will unveil the Union Budget 2010-11 on Friday,though,is unlikely to accept the TFC suggestion on introducing a rolling budget,and including off-budget liabilities in calculating deficit numbers.

Another significant suggestion of TFC,which officials expect could find mention in the Budget,is setting aside a Rs 40,000-crore fund to motivate states implement the goods and services tax (GST). TFC has also recommended doing away with all the cesses and surcharges,and expanding the tax base.

GST,a major indirect tax reform being planned by the government,is aimed at creating a uniform market across India by replacing the current plethora of central and state indirect taxes. In a public lecture last February,Kelkar estimated the value of GST reform to India will be $500 billion.

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The TFC report is being keenly awaited as it will broadly indicate how Mukherjee plans his stimulus exit strategy. The core strategy underpinning the Budget (2010-11) will be the finance ministers commitment to keeping the fiscal deficit to GDP ratio at the 5.5% target set by him last year, according to HDFC Bank chief economist Abheek Barua.