Tax Devolution: Finance Commission advised to treat FY21, FY22 differently
At a time when the Centre is facing difficulties to disburse GST compensation to states on the low revenue collection, the Economic Advisory Council of the 15th Finance Commission has advised the latter to treat the financial year 2020-21 and 2021-22 differently in comparison to the next four years.
The commission is to give recommendations for devolution of taxes and other fiscal matters over the next five years starting April 1, 2020.
An official statement said that during an online meeting of the advisory council with the commission, the council was of the view that the Finance Commission is faced with an “unprecedented situation of uncertainties”.
The council suggested that the 15th Finance Commission under the chairmanship of N. K. Singh will have to take a nuanced approach towards tax devolution to the states, other transfers, financing of expenditures in the midst of revenue strains including through borrowings and the path of fiscal consolidation.
“The Members of the Council also felt that the Commission will have to think unconventionally, especially in treating the five years at hand from 2021-22 to 2025-26. They advised that the base year 2020-21 and the first year of 2021-22 may need to be viewed differently from the remaining four years when the revenue situation is likely to improve gradually,” it said.
The meeting, chaired by N. K.Singh, was attended by all members of the Finance Commission and senior officials of the commission. From the Economic Advisory Council and the special invitees Arvind Virmani, Indira Rajaraman, D. K.Srivastava, M. Govinda Rao, Sudipto Mundle among others gave their views.
The commission will have a meeting with another set of distinguished scholars on Saturday to get their views.
The meeting on Friday discussed a wide gamut of issues around GDP growth, the tax buoyancy of the Centre and the states, GST compensation and fiscal consolidation.
Specific issues relating to public expenditure on health, investment revival, recapitalization of the financial system and its impact on public finances, focus on strengthening of defence capabilities, emerging trends in GST collections and its connection with improvements in its technology platform were also discussed.
The statement said that different views were expressed on the GDP growth in the current year in terms of the quarterly built-up, and the growth revival that is likely in the subsequent years.
The advisory council felt that the government debt relative to GDP is likely to increase steeply in the initial years, however, the purpose should be to endeavour to bring it down in the subsequent years.
In the initial years, this ratio will be affected by the increased revenue-expenditure imbalance on the numerator and the downward pressure on GDP on the numerator.