ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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A Comment on the Distribution Formula of the 13th Finance Commission

Out of the four different criteria used by the Thirteenth Finance Commission for inter se devolution of taxes, the criteria of fiscal capacity and fiscal discipline, which are given a weightage of about two-thirds in the formula, are inadequate, inconsistent and subjective. The allocation outcome based on such a formula, along with the discretionary nature of grants neither reflects equalisation nor efficiency and hence provides confusing signals to states for their future fiscal behaviour and growth orientation.

Two interesting aspects of the report of the Thirteenth Finance Commission (THFC) which are crucial for improving the revenues of the states, along with incentivising them for better fiscal performance, are worth highlighting:

One is that the weightage of the Index of Fiscal Discipline (IFD) in the tax devolution scheme has been increased to 17.5%, from 7.5% given by the Twelfth Finance Commission (TFC). This has been done by dropping an important indicator, namely, the tax-GSDP ratio, which can measure the fiscal efforts of a state.

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