11 3.5.

06 Suitable policy initiatives should be taken to improve the C-D ratio of bank
credit in the poorer States in a time-bound manner. Efforts should also be made to spread
the habit of banking among the poorer sections of society to achieve the objective of
financial inclusion.
(para 5.4.06)
SUMMARY OF RECOMMENDATIONS
3.5.07 All future Central legislations involving States’ involvement should provide
Chapter 5 – Issues in Centre-State Fiscal Relations for cost sharing as in the case of the RTE Act. Existing Central legislations where the
States are entrusted with the responsibility of implementation should be suitably amended
3.5.01 The Commission recommends a comprehensive review of all transfers to
providing for sharing of costs by the Central Government.
States with a view to minimizing the component of discretionary transfers, particularly
those channeled through CSS. (para 5.5.03)
(para 5.3.01) 3.5.08 The proposed enactment for providing food security to the poor should clearly
delineate the responsibilities of the Central and State Government in meeting the addi-
3.5.02 As the resources at the command of the States are limited, we recommend
tional cost of implementing the provisions of the Act.
higher Central transfers to backward States to enable them to improve their physical and
human infrastructure. (para 5.5.04)
(para 5.4.02) 3.5.09 The additional expenditure liabilities on States on account of the implemen-
tation of Central legislations should be fully borne by the Central Government. An insti-
3.5.03 To realize the benefits of past investments in backward regions of the coun-
tutional mechanism should be put in place to verify the additional cost and to ensure
try, we recommend that maintenance of assets already created should form an integral
reimbursement of such additional costs to States. It is recommended that issues giving
part of planning in these regions.
rise to such liabilities may be included as a part of permanent Terms of Reference of the
(para 5.4.03) Finance Commission.
3.5.04 We recommend the adoption of a multi-pronged strategy in the backward (para 5.5.06)
regions of the country comprising public investment in infrastructure development, pro-
3.5.10 The ToR of future Finance Commissions should be formulated in such a way
active policies to attract private investment, higher public expenditure on social sectors,
that the additional commitments of States on account of pay revision are fully taken into
such as health and education and area specific strategy for the growth of agricultural
account.
production.
(para 5.6.02)
(para 5.4.04)
3.5.11 The royalty rates on major minerals should be revised at least every three
3.5.05 We recommend that there should be greater focus on the issues of gover-
years without any delay. States should be properly compensated for any delay in the
nance in the less developed States of the country.
revision of royalty beyond three years.
(para 5.4.05)
(para 5.7.01)

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3.5.12 There is a case for reviewing the present arrangement regarding resource sharing 3.5.19 Quality of fiscal adjustment should be built into the FRBMA targets. We
between the Centre and the States and giving a share of the offshore royalty to States. recommend specification of targets with regard to maintaining certain levels of expenditure
on social services, maintenance and creation of capital assets in the FRBMA legislations.
(para 5R.8.01)
(para 5.12.03)
3.5.13 A part of the sale proceeds of spectrum should be devolved to States for
expenditure on infrastructure projects. 3.5.20 With a view to deriving the full benefits of FRBMA all off-budget liabilities
should be brought into fiscal accounting. Suitable adjustments should be made in the
(para 5.8.01)
deficit reduction targets to reflect changes in accounting practices if any.
3.5.14 We endorse fully the recommendation of FC-XII with regard to the sharing
(para 5.12.04)
of proceeds of service tax in the event of the notification of the 88th amendment to the
Constitution. 3.5.21 The FRBMA should be amended to clearly specify the circumstances which
should warrant deviation from the targets.
(para 5.9.02)
(para 5.12.05)
3.5.15 With the proposed introduction GST within the next one or two years, States
will have concurrent power to tax services. We, therefore, do not see any need to change 3.5.22 To bring greater accountability all fiscal legislations should provide for an
the status quo with regard to the levy of service tax in the interim period. annual assessment by an independent body and the reports of these bodies should be laid
in both Houses of Parliament/ State Legislature
(para 5.9.03)
(para 5.12.06)
3.5.16 The current ceiling on profession tax should be completely done away with by a
Constitutional amendment. 3.5.23 It is necessary that the present system of fixing overall borrowing limits is
continued to ensure adherence to FRBM targets.
(para 5.10.01)
(para 5.13.02)
3.5.17 The scope for raising more revenue from the taxes mentioned in article 268
should be examined afresh. This issue may be either referred to the next Finance Com- 3.5.24 Interest relief may be offered on loans from the NSSF by aligning the interest
mission or an expert Committee be appointed to look into the matter. rate on loans from the NSSF to the rate of interest on Government securities. The present
repayment period of 25 years in respect of loans from the NSSF may continue.
(para 5.11.03)
(para 5.14.02)
3.5.18 This ‘one-size fits all’ approach to fiscal consolidation has constrained fiscally
strong States to raise more resources. We, therefore, recommend State-specific targets of 3.5.25 It is the considered view of the Commission that direct transfers to imple-
fiscal deficit in the FRBM legislations of States. The fiscal correction path may factor in menting agencies should be stopped. It should be ensured that the State Governments
the variations in the initial fiscal situation across States and be made State-specific. pay interest in case of delays in the transfer of funds beyond 15 days of their receipt from
the Central Ministries.
(para 5.12.02)
(para 5.15.01).

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3.6.06 We are in favour of Finance Commission adopting more sophisticated meth-

ods to assess the needs of backward States and providing them with higher transfers.
3.5.26 The maintenance of macroeconomic stability is the responsibility of the
Performance -linked incentive grants are likely to be more effective in addressing the
Union and that States should be properly compensated for any additional expenditure
problems of backward States.
they bear or revenue loss they suffer on account of measures taken by the Union to
maintain macroeconomic stability. (para 6.7.02)
(para 5.16.01) 3.6.07 We are of the view the relative shares of tax devolution and grants should be
better left to the judgment of the Finance Commissions
Chapter 6 – Finance Commission Transfers
(para 6.7.03)
3.6.01 Considerations specified in the ToR of the Finance Commission should be
even handed as between the Centre and the States. There should be an effective mecha- Chapter 7 – Planning Commission and Plan Formulation
nism to involve the States in the finalization of the ToR of the Finance Commissions.
3.7.01 Planning Commission’s role in the post-reform period should be that of co-
(para 6.2.05) ordination to ensure that the sectoral plans drawn by different ministries are in confor-
mity with the overall objectives of the Plan. This may not require parallel subject matter
3.6.02 We are concerned about the increase in the revenue collected through cesses
Divisions in the Planning Commission. The practice of ministries seeking changes in
and surcharges. We recommend that the Central Government should review all the existing
approved projects may be dispensed with as long as sectoral allocations are adhered to
cesses and surcharges with a view to bringing down their share in the gross tax revenue.
(para 7.2.02)
(para 6.3.03)
3.7.02 A case for multi-year budgeting with a firm budget for the first year and
3.6.03 Because of the close linkages between the plan and non-plan expenditure, an
provisional for the second and third years assumes importance in the context of shortfall
Expert Committee may be appointed to look into the issue of distinction between the
in the realisation of resources envisaged for the Five-Year Plan. The FRBM Act envis-
plan and non-plan expenditure.
ages preparation of a Medium Term Fiscal Policy Statement but this cannot serve ad-
(para 6.4.04) equately the purpose a multi-year budgeting. We recommend adoption of multi-year bud-
geting by the Central and State Governments at the earliest
3.6.04 There should be much better coordination between the Finance Commission
and the Planning Commission. The synchronization of the periods covered by the Fi- (para 7.2.03)
nance Commission and the Five-Year Plan will considerably improve such coordination.
3.7.03 While the Planning Commission may finalise the Five-Year Plans in consul-
We recommend that another attempt be made to synchronize the periods.
tation with States to ensure broad correspondence with the national objectives, detailed
(para 6.5.02) exercise of approving States’ annual plans may not be necessary. The States should be
given freedom to plan according to their own needs and priorities within the framework
3.6.05 FC-XII recommended that the Finance Commission Division in the Ministry of nationally accepted priorities.
of Finance should be converted into a full-fledged department, serving as the permanent
secretariat for the Finance Commissions. We endorse this recommendation of FC-XII. (para 7.2.04)

(para 6.6.01)

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 Summary of Recommendations

3.7.04 Plan outlays should be based on realistic estimates of resources and within 3.7.10 The Commission is of the view that in place of multiplicity of institutions
the FRBM targets. that are existing at present to address the problems of the North East, there is a strong
case for setting up a single institution. This coordinating and planning role should be
(para 7.2.05)
undertaken by the Planning Commission which should set up a Regional Unit by subsum-
3.7.05 Steps should be taken to restore the share of State plan outlays to the previ- ing the NEC Secretariat and placing it under a designated Member of the Planning Com-
ous levels. mission preferably located in North East and having the required empowerment and
funds.
(para 7.3.02)
(para 7.7.06)
3.7.06 As the Gadgil formula was last revised more than 18 years ago, we recom-
mend its revision in the light of the recent developments. The share of Gadgil formula
transfers may be increased in a phased manner so as to restore the preeminence of these
3.7.11 In our opinion, the Planning Commission has a crucial role in the current
transfers.
situation. But its role should be that of coordination rather that of micro managing sectoral
(para 7.4.04) plans of the Central Ministries and the States.

3.7.07 The number of CSS should be restricted to flagship programmes of national (para 7.8.02)
and regional importance. Accordingly, we recommend reduction in the number of CSS
and their funding in a phased manner spread over the next five years. There should also be
flexibility in the guidelines governing the implementation of CSS to suit State-specific 3.7.12 The Planning Commission needs to concentrate on bringing about a system
situations. of multi-year budgeting in conjunction with the Ministry of Finance. Planning Commis-
sion has an important role in making recommendations over a wide area of public policy
(para 7.5.06)
along with the Reserve Bank of India, the Economic Advisory Council to the Prime
3.7.08 The share of poorer States in EAP has been negligible. Efforts should be Ministers and other Commissions and think tanks.
taken to enable the poorer States to access the EAP.
(para 7.8.02)
(para 7.6.01)
Chapter 8 – Fiscal Domain of Local Bodies
3.7.09 The Second Administrative Reforms Commission, based upon the input re- 3.8.01 We endorse the recommendation of NCRWC for the synchronization of the
ceived by a cross-section of public opinion and most of the State Governments, has periods of the Central Finance Commission and the SFCS. Since the timing of the ap-
come to the conclusion that the continuance of a ‘stand-alone’ Ministry with partial pointment of the Central Finance Commission is known, SFCs should be appointed in
responsibility for the North-East region is not in long term interest and have therefore advance so that their reports are available to the Central Finance Commission well in
recommended its abolition. The Commission endorses this view. time to ensure their consideration. It should also be ensured that the reference period of
(para 7.7.04) the SFCs should match that of the Central Finance Commission.
(para 8.2.09)

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 Summary of Recommendations

3.8.02 We recommend adoption of a uniform approach by the SFCs and as a first the initial years, it should be ensured that the share of the States in the combined revenue
step in this direction, the ToR should mandate the SFCs to adopt the common template receipts should not be lower than what would have accrued to them in the pre-GST
recommended by FC-XIII. regime
(para 8.2.10) (para 9.5.01)

3.8.03 This Commission recommends enactment of suitable legislation by all States 3.9.03 As the resource base of the States is limited, it would be difficult for them to
prescribing qualifications of persons to be appointed to the SFCs. absorb any revenue loss. We, therefore, recommend that the Centre should compensate
the States suffering revenue loss, if any, in the initial years of the introduction of GST.
(para 8.2.11).
(para 9.5.01)
3.8.04 The ATRs on the recommendations of the SFCs should be placed in the 3.9.04 Polluting inputs and outputs may be subjected to a special non-rebatable levy by
State Legislature within a period of three months from the date of their submission. both the Centre and the States. In addition petroleum products alcoholic beverages and
(para 8.2.12) tobacco products may also be subjected to a non-rebatable levy.
(para 9.5.02)
3.8.05 We are of the opinion that there should be some initiatives in the direction of
allowing local bodies to levy and collect certain State taxes and assigning the proceeds of 3.9.05 The existing machinery for arriving at collective decisions on GST should be
some other. The State Governments should not impose any restrictions on the rates of institutionalized on a permanent basis. Details with regard to the proposed institutional
taxes transferred to local bodies. Such empowerment should be in tandem with recom- mechanism may be worked out by consensus.
mendations made in volume IV of the Report on time bound devolution of functions and (para 9.5.03)
its completion by 2015.
3.9.06 We recommend a one-time grant to States for putting in place adequate IT
(para 8.3.02) infrastructure preparatory to the introduction of GST.
Chapter 9 – Goods and Services Tax (para 9.5.04)

3.9.01 We recommend the adoption of the dual GST to be levied by the Centre and Chapter 10 – Unified and Integrated Domestic Market
the States concurrently on a common base with fewer exemptions. Exemptions may be 3.10.01 There should be further reduction in the number of commodities covered
limited to unprocessed food services rendered by the governmental organizations and under the ECA and uniform liberalization of agricultural trade across States thorough
local bodies. All area based exemptions should be replaced by cash subsidy linked to suitable changes in APMC legislations
investment. The aggregate GST base should be large enough to permit lower rates. The
(para 10.3.01)
EC may work towards building up consensus in this direction
3.10.02 We endorse the suggestion of the Planning Commission that trade and mar-
(para 9.4.04) keting restrictions should be imposed only during exceptional situations of demand-sup-
3.9.02 To address the concerns of States with regard to accentuation of vertical ply dislocations and recommend necessary amendments to the ECA. The number of
imbalances the revenue neutral rates of GST should be worked out with care. The rates commodities covered under the Act should also be brought down further
for the Central and State components should be determined taking into account not only (para 10.3.02)
the present activities but likely revenue growth of taxes to be subsumed under GST. In

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 Summary of Recommendations

3.10.03 We recommend that steps should be taken to fully operationalise the provi-
sions of the Warehousing (Development and Regulation) Act, 2005. Suitable policy ini-
tiatives should be taken to encourage the private sector and cooperatives to set up godowns
and to specify standards for warehouse receipt system.
(para 10.3.03)
3.10.04 We recommend subsumation of purchase tax cesses and surcharges under
the proposed GST with a view to eliminating tax barriers to free trade.
(para 10.3.04).
3.10.05 We recommend abolition of CST as it is a pre-requisite for the introduction
of GST. Exports from one State to another State should be effectively zero rated such
that the revenues on inter-state sales accrue to the destination state.
(para 10.3.05)
3.10.06 We recommend the setting up of a Inter-State Trade and Commerce Com-
mission under Article 307 read with Entry 42 of List-I. This Commission should be
vested with both advisory and executive roles with decision making powers. As a Consti-
tutional body, the decisions of the Commission should be final and binding on all States
as well as the Union of India. Any party aggrieved with the decision of the Commission
may prefer an appeal to the Supreme Court.
(para 10.3.06)
3.10.07 We recommend setting up of a common checkpost manned by the officials
of two bordering States instead of multiple check posts.
(para 10.3.07)

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