Question

Which of the following is not a recommendation of the Fifteenth Finance Commission?

1. The Finance Commission has considered the 2014 population along with forest cover, tax effort, area of the state, and “demographic performance” to arrive at the states’ share in the divisible pool of taxes.

2. The Commission has reduced the vertical devolution to 41%.

3. The Commission has developed a criterion for the demographic effort which is the ratio of the state’s population in 1971 to its fertility rate in 2011.

1. 1 only
2. 2 only
3. 3 only
4. 1 and 3 only

Answer 1

Correct Answer - Option 1 : 1 only

The correct answer is 1 only.

Recommendations of the Fifteenth Finance Commission

• The share of states in the centre’s taxes is recommended to be decreased from 42% during the 2015-20 periods to 41% for 2020-21. Hence, Statement 2 is correct.
  • The 1% decrease is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the central government.
• The Finance Commission has considered the 2011 population along with forest cover, tax effort, area of the state, and “demographic performance” to arrive at the states’ share in the divisible pool of taxes. Hence, Statement 1 is incorrect.
• Criteria for devolution:
  • Income distance: 45%
  • Population (2011): 15%
  • Area:15%
  • Forest and Ecology: 10%
  • Demographic performance: 12.5%
  • Tax Effort: 2.5%.
• The Demographic Performance criterion has been introduced to reward efforts made by states in controlling their population. Hence, Statement 3 is correct.
  • It will be computed by using the reciprocal of the total fertility ratio of each state, scaled by 1971 population data.
• Tax effort has been used to reward states with higher tax collection efficiency.
  • It is the ratio of the average per capita own tax revenue and the average per capita state GDP during the three-year period between 2014-15 and 2016-17.
• The Commission observed that financing capital expenditure through off-budget borrowings detracts from compliance with the FRBM Act.
  • It is recommended that both the central and state governments should make full disclosure of extra-budgetary borrowings.
  • The outstanding extra-budgetary liabilities should be clearly identified and eliminated in a time-bound manner.

• The Commission highlighted some challenges with the implementation of the Goods and Services Tax (GST)
  • A large shortfall in collections as compared to the original forecast
  • High volatility in collections
  • accumulation of large integrated GST credit
  • Glitches in invoice and input tax matching
  • Delay in refunds