1449115333_14th Finance Commission - Report summary.pdf
 
The report of the Fourteenth Finance Commission, chaired by Y.V. Reddy, was tabled in Parliament on February 24, 2015. The Finance Commission is a constitutional body that is formed once in five years, and provides recommendations on centre-state financial relations.  Recommendations of the 
14thCommission include: 
 
Devolution of taxes to states:  Tax 
devolution should be the primary source of transfer of funds to states.  The share of taxes of the centre to states is recommended to be increased from 32% to 42%.   
 
Additional budgetary needs of the states will be filled by grants-in-aid to the states.  The total revenue deficit grant to states in the 2015-20 period is recommended to be Rs 1,94,821 crore.   
 
Weights of indicators for share in taxes:  
The weights of various indicators in the 
calculation of states' share of taxes have been 
fixed at the following: (i) 1971 population: 17.5%, 2011 population: 10%, (ii) area: 2% for smaller states, 15% for general weight, (iii) forest cover: 7.5%, and (iv) income distance (distance of state's income from the state having the highest income): 50%. 
 
Fiscal deficit: Fiscal deficit of states should 
be aimed at 3% of the Gross State Domestic 
Product (GSDP) during the period 2015 to 2020.States will be eligible for a flexibility of 0.25% over this limit. They will be eligible for this flexibility if their debt-GSDP ratio is less than or equal to 25% in the previous year.  
 
States will also have an option for an additional borrowing of 0.25% of their GSDP, if their interest payments are less than or equal to 10% of their revenue receipts in the previous year.  
 
Compensation to states for GST:  An 
autonomous and independent Goods and 
3rd

Services Tax (GST) Compensation Fund is to be set up in order to facilitate compensation to states.  Revenue compensation to states for the GST should be for five years.  100% compensation should be paid to states in the first three years, 75% compensation for the fourth year, and 50% compensation should be paid in the fifth year.   

 
Grants to local governments: The total grant 
to local governments for 2015-20 has been fixed at Rs 2,87,436 crore, of which Rs 2,00,292 crore is recommended to panchayats and Rs 87,144 crore to municipalities.   
 
Grants to local governments should be in two parts- a basic grant and a performance grant. For gram panchayats, 90% of the share will be basic grants, and 10% will be performance grants.  For municipalities, basic grants and performance grants will constitute 80% and 20% of the total grants, respectively.   
 
Performance grants are proposed to be introduced with a view to: (i) encourage the 
maintenance of the states' receipts and 
expenditure accounts, and (ii) bring about an increase in the state's own revenues.   
 
Amendments to FRBM Act:  The FRBM 
Act, 2003 should be amended, to remove the definition of effective revenue (difference between revenue deficit and grants for 
creation of capital assets). 
 
An independent fiscal council should be created to evaluate the fiscal policy implications of budget proposals, before the budget is announced. States are advised to amend their FRBM Acts in a similar manner. 
 
Alternatively, the FRBM Act may be replaced with a Debt Ceiling and Fiscal Responsibility Legislation, in order to bring greater legitimacy to fiscal management. 
 
Fourteenth Finance Commission Report