Recommendations of the Tenth Finance Commission (TFC)

The following points highlight the six main recommendations of the Tenth Finance Commission (TFC).

1. Share of the Income Tax:

The TFC rec­ommended that the share of states in the net pro­ceeds of the income tax to be fixed at 77.5% (com­pared to 85% fixed by the previous two finance commissions).

The reduction is as much as 7.5%. In fact, the surcharge on income tax had been with­drawn by the Centre with effect from the financial year 1994-95.

The cost of collecting taxes, which used to be deducted from the proceeds of income tax, was apportioned between the income tax and the corporation tax. Again, the TFC included, in the divisible pool, the interest recoveries and pen­alties in respect of income tax.

As for the corporation tax, the TFC has in­cluded it in its recommendations, made in the wider context of diversifying and broadening the base of tax devolution. This recommendation, if accepted, would mean that the Centre will have to transfer 29% of the divisible pool which shall in­clude all central taxes, such as corporation tax, customs, wealth tax, gift tax and service tax.

The Commission later recommended a suit­able increase in excise duty, keeping in view the revenue needs of the Central Government. It may be noted that the excise duty is the most important source of revenue of the Government of India.

As for the inter-State distribution of income tax proceeds, the TFC has adopted the following criteria:

(a) 20% on the basis of population of 1971;

(b) 60% on the basis of distance of per capita income;

(c) 5% on the basis of area adjusted;

(d) 5% on the basis of index of infrastruc­ture;

(e) 10% on the basis of tax effort (collec­tion).

The TFC has applied the ‘distant formula’. It is based on information in respect of the distance of the per capita income of a State from that of the State with the highest per capita income, popula­tion of the State, and its per capita income. The shares of States are worked by taking up the re­spective ‘distances’, multiplying them by the popu­lation of the States, and obtaining the share by dividing the product by the sum of such products for all the States. This is called ‘scaling’.

2. Sharing of Union Excise Duties:

The TFC recommended that the shares of the States in the net proceeds of union excise duties to be raised to 47.5% from the existing 45% (as per the recom­mendations of the Ninth Finance Commission). This was due to the Commission’s recommenda­tion to compensate for the reduced share of states in the income tax.

As for the methods of distribution of excise duties among the states, the TFC has recommended that:

(i) 40% of the net proceeds of union excise duties would be distributed among the States us­ing the same criteria adopted for the distribution of income tax; and

(ii) the balance 7.5% of the net proceeds of the union excise duties would be dis­tributed among the deficit States.

3. Sharing of Additional Excise Duties in Lieu of Sales Tax:

The entire net proceeds of the addi­tional excise duty on sugar, textiles and tobacco accrue to the States. The Ninth Finance Commis­sion (NFC) recommended the use of the State Do­mestic Product (SDP) and population of each State to determine the share of each State in the pro­ceeds of additional duties of excise in lieu of sales tax. The TFC has continued the recommendations of NFC and has not changed the scheme of alloca­tion.

4. Grants in Lieu of Tax on Passenger Fares:

The TFC, as per the requests of the States, accepted that the grant in lieu of the tax on passenger’s fares should be 10.7% of the non-suburban passenger earnings. The total of such earnings for 1992-93 were Rs. 3,504 crores. On the basis of this figure, the TFC fixed the annual grant at Rs. 380 crores (i.e., 10.7% of Rs. 3,450 crores) to be paid to the States for the period 1995-2000.

5. Grants-in-Aid:

Grants-in-aid refer to un­conditional transfer of financial resources from the Centre to the States for enabling the latter to per­form their functions more smoothly and solve their problems. Accordingly, the TFC recommended Rs. 1,360 crores as up-gradation grants and Rs. 1,250 crores to solve special problems of States.

The TFC selected the following areas for up-gradation:

A. District Administration:

Police, fire serv­ice, jails, record rooms, treasuries and accounts.

B. Education:

Promotion of girls’ education, additional facilities for upper primary schools and drinking water facilities in primary schools.

Apart from these grants, the TFC has recom­mended that

(i) Grants-in-aid of about Rs. 7,580 crores to cover deficits on revenue account;

(ii) Calamity relief of Rs. 4,730 crores; and

(iii) Grants of Rs. 5,380 crores to local bodies, i.e., panchayats and municipalities.

Total grants-in-aid recommended by the TFC amount to Rs. 20,300 crores for the 5-year period (1995-2000).

6. Debt Position of States:

The TFC, like the NFC, was specifically given the power to as­sess the debt position of the States with respect to their entire debt and not merely for Central loans to States on a specific date. The TFC has also been asked to recommend measures for reducing fiscal deficit.

Accordingly, the TFC has recommended the following relief and corrective measures:

(a) A scheme of general debt relief for all States linked to fiscal performance;

(b) Specific relief for three States with fiscal stress, viz., Orissa, Bihar and U.P. For these States, the TFC recommended writing-off of 5% of repay­ment with respect to Central loans given during 1989-95 and outstanding on March 31, 1995; this would amount to Rs. 160 cores;

(c) Special loans to be made to Punjab to fight militancy and insurgency. For Punjab, one- third of the repayment of principal falling due during 1995-2000 would be waived. This should amount to a relief of Rs. 490 crores.

(d) A total relief of Rs. 44 crores to special category States.

In sum, TFC recommended total debt relief of Rs. 700 crores during the 5-year period.

Finally, out of the distributable proceeds of income tax, a sum equal to 0.927% has been ear­marked for distribution among the Union Territo­ries.