Finance Commission tips on tax will have "serious effects", says Abhijit Sen in dissent note

Abhijit Sen, part-time member of the Planning commission, has openly criticised some of the recommendations of the 14th Finance Commission, particularly with respect to the ones on sharing of taxes to state governments. The dissent note was carried in the report of the commission tabled in Parliament on Tuesday. “The recommendations regarding devolution and revenue deficit grants are bound to disrupt existing plan transfers, with likely very serious effects in the first year of the award period,” Sen said. In a dissent note, Sen said he is “constrained” with the fact that detailed discussions among the members of the commission on various topics haven’t fully translated to the recommendations. [caption id=“attachment_2119115” align=“alignleft” width=“380”]  Sen has criticised the recommendation that states’ share of taxes should be 42 percent. Image: IBNLive[/caption] For instance, Sen has criticised the recommendation of the 14th Finance Commission that states’ share of taxes should be 42 percent, much higher than the current 32 percent. In his note, Sen notes that the increased devolution is about a third of all current plan transfers. Going by the increased devolution suggested in the report, the states will get Rs 3.48 lakh crore in 2014-15 and Rs 5.26 lakh crore in 2015-16. In the note, Sen said he is “constrained” to note that, although the commission had very detailed and lively discussions on most subjects, there was reluctance on part of the chairman and other members to analyse the transition from the present situation. “I am, therefore, unable to agree fully with the recommendations in the main report,” Sen said. Following are the main areas of dissent/ recommendations from Sen: One, Sen wants the share of devolution to be set at 38 percent in the first year of the award period and maintain that level unless there is agreement in the new institutional mechanism to revert to the 42 percent share of tax devolution. Second, Sen says the manner in which present plan expenditures have been incorporated in the assessment carried out in the main report is confusing. This, according to him, suggests that the Commission’s award has fully absorbed transfers that were classified as Central Assistance to State Plans until the list was expanded to include centrally sponsored schemes in Budget 2014-15. Such a conclusion would be erroneous since the commission’s assessment was limited to states’ plan revenue expenditures only, and did not involve assessment of their plan capital expenditure, Sen argues. Third, Sen observes that some states, and especially some backward districts, could be hit if the Backward Region Grant Fund (BRGF) is wound up as part of pruning plan transfers consequent to the award. The commission has noted that the responsibility for area-specific needs below this level is that of the states. “We have not assessed the implications of a possible winding-up of BRGF. I have two concerns here,” Sen says. Fourth, Sen warns that the country will be ill-served if Rashtriya Krishi Vikas Yojana (RKVY) is pruned excessively as part of reallocations following the award of the 14th Finance Commission. According to Sen, the RKVY is again completely formula-driven and has contributed significantly to the improved growth performance of Indian agriculture (from about 2.5% during 1997-98 to 2006-07 to nearly 4% subsequently).