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In November 2017, the 15th Finance Commission (Chair: Mr N. K. Singh) was constituted to give recommendations on the transfer of resources from the centre to states for the five year period between 2020-25. In recent times, there has been some discussion around the role and mandate of the Commission. In this context, we explain the role of the Finance Commission.
What is the Finance Commission?
The Finance Commission is a constitutional body formed every five years to give suggestions on centre-state financial relations. Each Finance Commission is required to make recommendations on: (i) sharing of central taxes with states, (ii) distribution of central grants to states, (iii) measures to improve the finances of states to supplement the resources of panchayats and municipalities, and (iv) any other matter referred to it.
Composition of transfers: The central taxes devolved to states are untied funds, and states can spend them according to their discretion. Over the years, tax devolved to states has constituted over 80% of the total central transfers to states (Figure 1). The centre also provides grants to states and local bodies which must be used for specified purposes. These grants have ranged between 12% to 19% of the total transfers.
Over the years the core mandate of the Commission has remained unchanged, though it has been given the additional responsibility of examining various issues. For instance, the 12th Finance Commission evaluated the fiscal position of states and offered relief to those that enacted their Fiscal Responsibility and Budget Management laws. The 13th and the 14th Finance Commissionassessed the impact of GST on the economy. The 13th Finance Commission also incentivised states to increase forest cover by providing additional grants.
15th Finance Commission: The 15th Finance Commission constituted in November 2017 will recommend central transfers to states. It has also been mandated to: (i) review the impact of the 14th Finance Commission recommendations on the fiscal position of the centre; (ii) review the debt level of the centre and states, and recommend a roadmap; (iii) study the impact of GST on the economy; and (iv) recommend performance-based incentives for states based on their efforts to control population, promote ease of doing business, and control expenditure on populist measures, among others.
Why is there a need for a Finance Commission?
The Indian federal system allows for the division of power and responsibilities between the centre and states. Correspondingly, the taxation powers are also broadly divided between the centre and states (Table 1). State legislatures may devolve some of their taxation powers to local bodies.
The centre collects majority of the tax revenue as it enjoys scale economies in the collection of certain taxes. States have the responsibility of delivering public goods in their areas due to their proximity to local issues and needs.
Sometimes, this leads to states incurring expenditures higher than the revenue generated by them. Further, due to vast regional disparities some states are unable to raise adequate resources as compared to others. To address these imbalances, the Finance Commission recommends the extent of central funds to be shared with states. Prior to 2000, only revenue income tax and union excise duty on certain goods was shared by the centre with states. A Constitution amendment in 2000 allowed for all central taxes to be shared with states.
Several other federal countries, such as Pakistan, Malaysia, and Australia have similar bodies which recommend the manner in which central funds will be shared with states.
Tax devolution to states
The 14th Finance Commission considerably increased the devolution of taxes from the centre to states from 32% to 42%. The Commission had recommended that tax devolution should be the primary source of transfer of funds to states. This would increase the flow of unconditional transfers and give states more flexibility in their spending.
The share in central taxes is distributed among states based on a formula. Previous Finance Commissions have considered various factors to determine the criteria such as the population and income needs of states, their area and infrastructure, etc. Further, the weightage assigned to each criterion has varied with each Finance Commission.
The criteria used by the 11th to 14thFinance Commissions are given in Table 2, along with the weight assigned to them. State level details of the criteria used by the 14th Finance Commission are given in Table 3.
Grants-in-Aid
Besides the taxes devolved to states, another source of transfers from the centre to states is grants-in-aid. As per the recommendations of the 14th Finance Commission, grants-in-aid constitute 12% of the central transfers to states. The 14th Finance Commission had recommended grants to states for three purposes: (i) disaster relief, (ii) local bodies, and (iii) revenue deficit.
On October 18, it was reported in the news that the central government has been given more time for framing rules under the Citizenship (Amendment) Act, 2019. The President had given assent to this Act in December 2019 and the Act came into force in January 2020. Similarly, about two years have passed since the new labour codes were passed by Parliament, and the final Rules are yet to be published. This raises the question how long the government can take to frame Rules and what is the procedure guiding this. In this blog, we discuss the same.
Under the Constitution, the Legislature has the power to make laws and the Executive is responsible for implementing them. Often, the Legislature enacts a law covering the general principles and policies, and delegates the power to the Executive for specifying certain details for the implementation of a law. For example, the Citizenship Amendment Act provides who will be eligible for citizenship. The certificate of registration or naturalization to a person will be issued, subject to conditions, restrictions, and manner as may be prescribed by the central government through Rules. Delay in framing Rules results in delay in implementing the law, since the necessary details are not available. For example, new labour codes provide a social security scheme for gig economy workers such as Swiggy and Zomato delivery persons and Uber and Ola drivers. These benefits as per these Codes are yet to be rolled out as the Rules are yet to be notified.
Timelines and checks and balances for adherence
Each House of Parliament has a Committee of Members to examine Rules, Regulations, and government orders in detail called the Committee on Subordinate Legislation. Over the years, the recommendations of these Committees have shaped the evolution of the procedure and timelines for framing subordinate legislation. These are reflected in the Manual of Parliamentary Procedures issued by the Ministry of Parliamentary Affairs, which provides detailed guidelines.
Ordinarily, Rules, Regulations, and bye-laws are to be framed within six months from the date on which the concerned Act came into force. Post that, the concerned Ministry is required to seek an extension from the Parliamentary Committees on Subordinate Legislation. The reason for the extension needs to be stated. Such extensions may be granted for a maximum period of three months at a time. For example, in case of Rules under the Citizenship Amendment Act, 2019, at an earlier instance, an extension was granted on account of the onset of the COVID-19 pandemic.
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To ensure monitoring, every Ministry is required to prepare a quarterly report on the status of subordinate legislation not framed and share it with the Ministry of Law and Justice. These reports are not available in the public domain.
Recommendations to address delays
Over the years, the Subordinate Legislation Committees in both Houses have observed multiple instances of non-adherence to the above timelines by various Ministries. To address this, they have made the following key recommendations:
Are all Rules under an Act required to be framed?
Usually, the expressions used in an Act are “The Central Government may, by notification, make rules for carrying out the provisions of this Act.”, or “as may be prescribed”. Hence, it may appear that the laws aim to enable rule-making instead of mandate rule-making. However, certain provisions of an Act cannot be brought into force if the required details have not been prescribed under the Rules. This makes the implementation of the Act consequent to the publication of respective Rules. For example, the Criminal Procedure (Identification) Act, 2022 enables the police and certain other persons to collect identity-related information about certain persons. It provides that the manner of collection of such information may be specified by the central government. Unless the manner is prescribed, such collection cannot take place.
That said, some other rule-making powers may be enabling in nature and subject to discretion by the concerned Ministry. In 2016, Rajya Sabha Committee on Subordinate Legislation examined the status of Rules and Regulations to be framed under the Energy Conservation Act, 2001. It observed that the Ministry of Power had held that two Rules and three Regulations under this Act were not necessary. The Ministry of Law and Justice had opined that those deemed not necessary were enabling provisions meant for unforeseen circumstances. The Rajya Sabha Committee (2016) had recommended that where the Ministry does not feel the need for framing subordinate legislation, the Minister should table a statement in Parliament, stating reasons for such a conclusion.
Some key issues related to subordinate legislation
The Legislature delegates the power to specify details for the implementation of a law to the Executive through powers for framing subordinate legislation. Hence, it is important to ensure these are well-scrutinised so that they are within the limits envisaged in the law.
See here for our recently published analysis of the Criminal Procedure (Identification) Rules, 2022, notified in September 2022. Also, check out PRS analysis of:
