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Unit 26: 12 and 13 Finance Commissions
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there is a vertical imbalance in the distribution of these taxing powers which has worsened over time, Notes
while in the total revenue expenditure there has been long term stability in the relative shares of the
Centre and the states after implementation of the transfers recommended by the Finance Commission,
the buoyancy of central taxes has been higher than those of the states and such a trend is expected to
continue, given the nature of tax assignment to the Centre and states. Thus the commission
recommended that to maintain constancy in the share of states in post-devolution total tax revenue,
there is a need to increase the share of states by the margin by which the buoyancy of central tax
revenue exceed the buoyancy of combined tax revenue. This implies that given the higher buoyancy
of central tax revenue, share of states in total central tax revenue to be increased, so that the revenue
of centre and state taxes equalises in post devolution stage.
On the expenditure side, the commission notes that the, states have higher ‘fixed costs’ than the
Centre, as reflected in their higher share of committed expenditure in total non-plan expenditure
relative to the Centre. In addition, states have restrictions placed on their borrowing powers. In
addition, over the period 2010-15, there is an added fiscal burden posed by the states’ pay awards,
following that of the Sixth Central Pay Commission (CPC). The fiscal burden of the latest round of
pay awards is much higher for the states in absolute as well as relative terms.
The commission preferred to discount the projected growth rates as given to it by the Planning
Commission. This implies conservative revenue buoyancy for the centre and the states. The commission
notes that its fiscal correction targets are not overly ambitious, and are more likely to lead to a situation
where performance is better than the promise.
Poor States Get Less Subsidies
Commission further notes that there is always a choice between delivery of public goods and services
and provision of subsidies for private goods. But there is always a need for well directed subsidies
such that they reach the target group. But this always does not happen. For instance poorer states
don’t stand to gain from three major subsidies, viz. food, fertiliser and petroleum, as share of poorer
states were found to be far lower than the national average. The reasons for this may vary across the
subsidies. Food subsidies are determined inter alia by efficiency of administrative arrangements in
the respective states, as well as by their fiscal capacity to provide additional subsidies. The use of
fertilisers is directly linked to irrigation facilities created and the size of land holdings. Consumption
of petroleum products is directly proportional to the purchasing power of citizens. This implies that
poorer states tend to receive much lower share in subsidies (food, fertiliser and petroleum given by
the centre. In view of the objective of inclusive growth, regressive untargeted subsidies that reduce
fiscal space for key growth-promoting public investments and delivery of public goods to enhance
inclusiveness are, today, a fiscal obstacle to the acceleration of India’s development transformation.
Therefore the commission favored a fiscal path, wherein subsidies are closely targeted.
In view of all the arguments, as given above the Thirteenth Finance Commission recommended that
1. The share of States in net proceeds of shareable Central taxes shall be 32 per cent every year for
the period of the award.
2. Revenue accruing to a State is to be protected to the levels that would have accrued to it had
service tax been a part of the shareable Central taxes, if the 88 Amendment to Constitution is
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notified and followed up by a legislations enabling States to levy service tax.
3. Centre is to review the levy of ceases and surcharges with a view to reducing their share in its
gross tax revenue.
4. Future fiscal roadmap should be designed in such a manner that subsidies are closely targeted.
Public spending on subsidies that detract from inclusive growth should be discouraged.
Horizontal Devolution : Issues and Approach
The commission noted that the previous finance commissions have identified for major issues which
are needed to the addressed. First, the fiscal needs vary from state to state, as they are at different
stages of the development transformation. Some times aggregate state level development indicators
do not capture the fiscal needs as there are variations even at district level. Second, fiscal capacity

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