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States object to plan to create defence fund out of divisible central taxes
September, 14th 2020

Several states have raised concerns with the 15th Finance Commission over the central government’s proposal to create a non-lapsable defence fund out of the divisible pool of central taxes, ET has learnt.

The commission is set to submit its final report on devolution of funds for the next five years in the coming days. These states have sent in additional memoranda to the commission over the last two months, pointing out that allocation of funds for defence was entirely the responsibili of the union government, should come from the Consolidated Fund of India and not result in any reduction in the divisible pool of central taxes.

 They have also pointed out that expenses incurred towards internal security in states were also mostly paid for by state governments.

Almost all states have submitted to the commission that in view of the economic onslaught brought in by Covid-19, it must allow unconditional increase in borrowing limits for states, increase the devolution to them, allow a special fund to address pandemic-related concerns, extend the period for GST compensation and guard against any decrease in federal funding.

In 2019, the central government had added a new term of reference for the 15th Finance Commission, asking it to examine the scope of setting up a non-lapsable defence and internal security fund. The commission, chaired by NK Singh, has taken legal opinion on the matter from noted lawyer K Parasaran before addressing the term of reference.

The Andhra Pradesh government is learnt to have pointed out that defence was in the Centre’s remit under the Union List of the Seventh Schedule of the Constitution and while states had a paramount interest in the security of the nation, their constitutional mandate was to focus on development needs of the citizens, for which substantial amount of resources were required.

It has urged the commission to consider the fiscal constraints of states, and “ensure that the central gross tax revenues are not reduced by excluding any particular central government expenditures”.

Telangana government
Telangana has echoed the view saying that such a mechanism for defence funding must be from within the Consolidated Fund of India and not result in any reduction in the divisible pool of central taxes. It also pointed out that as far as internal security was concerned, states were already taking major responsibility and reimbursed expenses towards deployment of central security forces with the exception of border security, and the status quo must be main ..

Madhya Pradesh government
In Madhya Pradesh said in its July memorandum that the additional term of reference (ToR), “especially in the light of the Union’s tendency of collecting more and more revenues through cesses and surcharges, has raised an apprehension among the states that the new ToR is trying to introduce another non-shareable revenue stream for the Union to get the states to bear the cost of central expenditures by further curtailing the divisible pool and reduce ..

The state has submitted that it was perplexing why the Centre referred the matter to the finance commission when the issue could be resolved through reallocation of expenditures that were available to it.

Odisha government
Naveen Patnaik-led Odisha government is learnt to have pointed out that while this additional ToR could potentially have an adverse impact on vertical devolution of shareable taxes for states, states had not been consulted before it was brought in.

Odisha, among other states, has also objected to clubbing internal security with defence for this proposed fund. The state has also recalled 13th FC advising the Centre to expand the fiscal space available for defence spending by improving the quality and efficiency of defence expenditure.

Questioning decision on J&K
Several states are also learnt to have objected to bringing Jammu & Kashmir within the ambit of the finance commission and termed it a deviation from the constitutional provisions under Article 280. They argued that the inclusion of J&K would set a bad precedent as the remaining two Union Territories with legislature, Delhi and Puducherry, might make a similar claim for inclusion in the awards of future finance commissions which would hit the states’ share in the divisible pool.

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