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Fin panel offers new path to fiscal health
December, 31st 2009

The Finance Commission, which makes recommendations on sharing of tax revenues by the Centre and states, has suggested a new path for fiscal prudence in its report submitted to President Pratibha Patil on Wednesday.

We had been asked to suggest a new path for fiscal consolidation...we have recommended (the) fiscal path for the next five years (2010-15), Finance Commission chairman Vijay Kelkar told reporters.

The government had last year consigned the Fiscal Responsibility and Budget Management (FRBM), the self-imposed fiscal prudence guidelines, to the backburner when it stepped up official spending beyond its means to insulate the economy from the global financial meltdown.

Fiscal deficit, a reflection of government borrowings, is estimated to touch 6.8% in 2009-10, up from 6.2% in the previous fiscal, mainly on account of the stimulus measures.

Finance minister Pranab Mukherjee said the recommendations of the 13th Finance Commission would be getting reflected in the 2010-11 Budget (to be presented in Lok Sabha in February).

The report, Mr Kelkar said, dealt with sharing of tax revenue between the Centre and states, distribution of funds among states and support to local bodies.

The Finance Commission report assumes significance in view of the ongoing reforms in indirect and direct taxes, which will have a bearing on tax collections.

The government proposes to introduce the goods and services tax (GST) that will subsume levies like excise, VAT and service tax from April 1, next year.

The Direct Tax Code, which will replace the Income-Tax Act, 1961, is currently in the public domain for debate and suggestions.

As required by the Constitution, the Finance Commission was set up in November 2007 to suggest devolution of tax receipts between the Centre and the states.

The government extended the term of the commission in September 2009 up to January-end and requested it to submit the report by December so as to give effect to its suggestions in the Budget.

Besides the chairman, other members of the commission are BK Chaturvedi, Indira Rajaraman, Atul Sarma and Sanjiv Misra.

The report, after being adopted by the Cabinet, will be tabled in Parliament.

Currently, states and Union Territories get Rs 1.64 lakh crore in a year, or around 30% of the shareable taxes collected by the Centre.

The total tax revenue of the government, which include shareable and non-shareable taxes, has been estimated at Rs 6,41,079 crore during 2009-10.

The Twelfth Finance Commission had recommended that 30.5% of the shareable central taxes should be shared among the states and the Union Territories.

The shareable central taxes include corporation tax, income tax, wealth tax, Customs, excise duty and service tax. The taxes, which are not shared with states include some cesses like education and road.

Among other things, the commission has also suggested steps to deal with the growing off-budget expenditure, especially, oil bonds. These expenses are not reflected in the normal budgetary process but do increase the liability of the government.

During 2008-09, the off-budget expenses, mainly on account of oil bonds, had been estimated at 0.8% of the Gross Domestic Product (GDP).

The report, likely to be made public in February before the Budget, also looked at the implications of environment and climate change, ways to improve outcomes and outputs of public expenditure, and impact of GST on trade, Kelkar said.

 
 
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