Finance Commission recommends 42% of divisible tax pool to states for FY22-26

02 Feb 2021 Evaluate

The 15th Finance Commission, in its latest report, has recommended that the states be given 42 per cent of the divisible tax pool of the Centre during the period 2021-22 to 2025-26 (FY22-26). The panel's report also provides a range for fiscal deficit and debt path of both the Union and states and also recommended additional borrowing room to states based on performance in power sector reforms. Finance Commission is a constitutional body that gives suggestions on Centre-state financial relations.

In order to maintain predictability and stability of resources, especially during the pandemic, the 15th Finance Commission has recommended ‘maintaining the vertical devolution at 41 per cent the same as in our report for 2020-21’. The Commission said it is at the same level of 42 per cent of the divisible pool as recommended by the 14th Finance Commission, and added that however, a required adjustment has been made of ‘about 1 per cent due to the changed status of the erstwhile state of Jammu and Kashmir into the new Union Territories of Ladakh and Jammu and Kashmir’.

As per the glide path, fiscal deficit should be 6 per cent in 2021-22, 5.5 per cent in 2022-23, 5 per cent in 2023-24, 4.5 per cent in 2024-25, and 4 per cent in 2025-26. As per the Commission, the gross tax revenues for a five-year period is expected to be Rs 135.2 lakh crore. Out of that, divisible pool (after deducting cesses and surcharges and cost of collection) is estimated to be Rs 103 lakh crore. States' share at 41 per cent of divisible pool comes to 42.2 lakh crore for 2021-26 period.

It said ‘including total grants of Rs 10.33 lakh crore and tax devolution of Rs 42.2 lakh crore, aggregate transfers to states is estimated to remain at around 50.9 per cent of the divisible pool during 2021-26 period’. Total transfers (devolution + grants) constitutes about 34 per cent of estimated Gross Revenue Receipts of the Union leaving adequate fiscal space for the Union to meet its resource requirements and spending obligations on national development priorities.

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