13 th Finance Commission

Following the mandate under the Presidential Order indicating the terms of reference, which flow from the articles 270, 275
and 280 of the Indian Constitution, the FC-XIII submitted its report on December 30, 2009. The FC-XIII’s overall approach
was to foster “inclusive and green growth promoting fiscal federalism”. Observing that as against the level of 75 per cent
targeted by the Twelfth Finance Commission, the combined debt-GDP ratio was 82 per cent in the terminal year (2009-10),
the FC-XIII focused on anchoring the fiscal consolidation process in a medium-term debt reduction framework. The FC-XIII
proposes reducing the combined debt-GDP ratio to 68 per cent by 2014-15 with the Centre’s debt-GDP ratio declining to
45 per cent. It recommended a calibrated exit strategy from the expansionary fiscal stance of 2008-09 and 2009-10.
The FC-XIII has recommended fiscal consolidation through the elimination of revenue deficit as the long-term target for both
the Centre and States. Following a design similar to that adopted by the recent Finance Commissions, the FC-XIII indicated
a normative discipline for both Centre and States; with equal treatment which entailed no automatic priority for any level of
Government and a focus on equalization (and not equity). The latter signalled the intent of the FC-XIII to ensure that States
and local bodies have the fiscal potential to provide comparable levels of public service at reasonably comparable levels of
taxation. This principle does not guarantee uniformity in public services across the country; but it addresses the fiscal
requirements of each jurisdiction to enable such uniformity.
Terming the goods and services Tax (GST) as a game-changing tax reform measure which will significantly contribute to the
buoyancy of tax revenues and acceleration of growth as well as generate positive externalities, the FC-XIII proposed a grand
bargain. The six elements of the grand bargain for the GST included: 1. the design; 2. operational modalities; 3. binding
agreement between the Centre and States with contingencies for change in rates and procedures; 4. disincentives for
non-compliance; 5. the implementation schedule and; 6. the procedure for States to claim compensation. For this purpose,
the FC-XIII recommended the sanction of Rs 50,000 crore as compensation for revenue losses of States on account of the
implementation of the GST. This amount would shrink to Rs 40, 000 crore were the implementation to take place on/after
April 1, 2013 and further to Rs 30,000 crore were it to take place on/after April 1, 2014.
The following are some of the key recommendations of the FC-XIII:
 The share of States in net proceeds of shareable Central taxes shall be 32 per cent every year for the period of the award.
 Revenue accruing to a State is to be protected to the levels that would have accrued to it had service tax been a part
of the shareable Central taxes, if the 88th Amendment to Constitution is notified and followed up by a legislations
enabling States to levy service tax.
 Centre is to review the levy of cesses and surcharges with a view to reducing their share in its gross tax revenue.
 The indicative ceiling on overall transfers to States on revenue account may be set at 39.5 per cent of gross revenue
receipts of the Centre.
 The Medium Term Fiscal Plan (MTFP) should be a statement of commitment rather than intent.
 New disclosures have been specified for the Budget/MTFP including on tax expenditure, public-private partnership
liabilities and the details of variables underlying receipts and expenditure projections.
 The Fiscal Responsibility and Budget Management (FRBM) Act needs to specify the nature of shocks that would
require relaxation of the targets thereunder.
 States are expected to be able to get back to their fiscal correction path by 2011-12 and amend their FRBM Acts to the
effect.
 State Governments are to be eligible for the general performance and special area performance grants only if they
comply with the prescribed stipulation in terms of grants to local bodies.
 The National Calamity Contingency Fund (NCCF) should be merged with the National Disaster Response Fund
(NDRF) and the Calamity Relief Fund (CRF) with the State Disaster Response Funds (SDRFs) of the respective States.
 A total non-Plan revenue grant of Rs 51,800 crore is recommended over the award period for eight States. A performance
grant of Rs 1500 crore is recommended for three special category States that have graduated from a non-Plan revenue
deficit situation.
 An amount of Rs 19,930 crore has been recommended as grant for maintenance of roads and bridges for four years
(2011-12 to 2014-15).
 An amount of Rs 24,068 crore has been recommended as grant for elementary education.
 An amount of Rs 27,945 crore has been recommended for State-specific needs.
 Amounts of Rs 5,000 crore each as forest, renewable energy and water sector-management grants have been
recommended.
 A total sum of Rs 3,18,581 crore has been recommended for the award period as grants-in-aid to States. (Source: Economic Survey, 2009-2010)