The Finance Commission is a constitutional body formed by the President of India to give suggestions on centre-state financial relations. The 15th Finance Commission is required to submit two reports. The first report will consist of recommendations for the financial year 2020-21. The final report with recommendations for the 2021-26 period will be submitted by October 30, 2020. In this post, we explain the key recommendations of the report.
What is the amount of tax devolution to the states, and how is it being calculated?
The Finance Commission uses certain criteria when deciding the devolution to states. For example, income distance criterion has been used by the 14th and 15th Finance Commissions. Under this criterion, states with lower per capita income would be given a higher share to maintain equity among states. Another example is Demographic Performance criterion which has been introduced by the 15th Finance Commission. The Demographic Performance criterion is to reward efforts made by states in controlling their population.
The 15th Finance Commission used the following criteria while determining the share of states: (i) 45% for the income distance, (ii) 15% for the population in 2011, (iii) 15% for the area, (iv) 10% for forest and ecology, (v) 12.5% for demographic performance, and (vi) 2.5% for tax effort. For 2020-21, the Commission has recommended a total devolution of Rs 8,55,176 crore to the states, which is 41% of the divisible pool of taxes. This is 1% lower than the percentage recommended by the 14th Finance Commission.
Table 1 below compares the new criteria with the criteria recommended by the 14th Finance Commission.
Table 1: Criteria for devolution (2020-21)
|
Criteria |
14th FC 2015-20 |
15th FC 2020-21 |
|
Income Distance |
50.0 |
45.0 |
|
Population 1971 |
17.5 |
- |
|
Population 2011 |
10.0 |
15.0 |
|
Area |
15.0 |
15.0 |
|
Forest Cover |
7.5 |
- |
|
Forest and Ecology |
- |
10.0 |
|
Demographic Performance |
- |
12.5 |
|
Tax Effort |
- |
2.5 |
|
Total |
100 |
100 |
Sources: Report for the year 2020-21, 15th Finance Commission; PRS.
Uttar Pradesh and Bihar have received the largest devolutions for 2020-21, receiving Rs 1,53,342 crore, and Rs 86,039 crore respectively. Karnataka and Kerala saw the largest decreases in the share of the divisible pool with a decrease of 0.49% and 0.25% respectively. Table 2 below displays the state-wise breakdown of the share in the divisible pool and the total devolution.
Table 3: Share of states in the centre’s taxes
|
State |
14th Finance Commission |
15th Finance Commission |
Devolution for FY 2020-2021 |
||
|
Share out of 42% |
Share in divisible pool |
Share out of 41% |
Share in divisible pool |
(In Rs crore) |
|
|
Andhra Pradesh |
1.81 |
4.31 |
1.69 |
4.11 |
35,156 |
|
Arunachal Pradesh |
0.58 |
1.38 |
0.72 |
1.76 |
15,051 |
|
Assam |
1.39 |
3.31 |
1.28 |
3.13 |
26,776 |
|
Bihar |
4.06 |
9.67 |
4.13 |
10.06 |
86,039 |
|
Chhattisgarh |
1.29 |
3.07 |
1.4 |
3.42 |
29,230 |
|
Goa |
0.16 |
0.38 |
0.16 |
0.39 |
3,301 |
|
Gujarat |
1.3 |
3.1 |
1.39 |
3.4 |
29,059 |
|
Haryana |
0.46 |
1.1 |
0.44 |
1.08 |
9,253 |
|
Himachal Pradesh |
0.3 |
0.71 |
0.33 |
0.8 |
6,833 |
|
Jammu and Kashmir |
0.78 |
1.86 |
- |
- |
- |
|
Jharkhand |
1.32 |
3.14 |
1.36 |
3.31 |
28,332 |
|
Karnataka |
1.98 |
4.71 |
1.49 |
3.65 |
31,180 |
|
Kerala |
1.05 |
2.5 |
0.8 |
1.94 |
16,616 |
|
Madhya Pradesh |
3.17 |
7.55 |
3.23 |
7.89 |
67,439 |
|
Maharashtra |
2.32 |
5.52 |
2.52 |
6.14 |
52,465 |
|
Manipur |
0.26 |
0.62 |
0.29 |
0.72 |
6,140 |
|
Meghalaya |
0.27 |
0.64 |
0.31 |
0.77 |
6,542 |
|
Mizoram |
0.19 |
0.45 |
0.21 |
0.51 |
4,327 |
|
Nagaland |
0.21 |
0.5 |
0.23 |
0.57 |
4,900 |
|
Odisha |
1.95 |
4.64 |
1.9 |
4.63 |
39,586 |
|
Punjab |
0.66 |
1.57 |
0.73 |
1.79 |
15,291 |
|
Rajasthan |
2.31 |
5.5 |
2.45 |
5.98 |
51,131 |
|
Sikkim |
0.15 |
0.36 |
0.16 |
0.39 |
3,318 |
|
Tamil Nadu |
1.69 |
4.02 |
1.72 |
4.19 |
35,823 |
|
Telangana |
1.02 |
2.43 |
0.87 |
2.13 |
18,241 |
|
Tripura |
0.27 |
0.64 |
0.29 |
0.71 |
6,063 |
|
Uttar Pradesh |
7.54 |
17.95 |
7.35 |
17.93 |
1,53,342 |
|
Uttarakhand |
0.44 |
1.05 |
0.45 |
1.1 |
9,441 |
|
West Bengal |
3.08 |
7.33 |
3.08 |
7.52 |
64,301 |
|
Total |
42 |
100 |
41 |
100 |
8,55,176 |
Sources: Reports of 14th and 15th Finance Commission; PRS.
What are the various grants recommended by the 15th Finance Commission?
The Terms of Reference of the Finance Commission require it to recommend grants-in-aid to the States. These grants include: (i) revenue deficit grants, (ii) grants to local bodies, and (iii) disaster management grants.
14 states are estimated to face a revenue deficit post-devolution. To make up for this deficit, the Commission has recommended revenue deficit grants worth Rs 74,341 crore to these 14 states. Additionally, three states (Karnataka, Mizoram, and Telangana) have received special grants worth Rs 6,674 crore. The special grants are being given to compensate for a decline in the sum of tax devolution and revenue deficit grants in 2020-21 as compared to 2019-20.
The Commission has recommended a total of Rs 90,000 crore for grants to the local bodies in 2020-21. This amounts to an increase over the Rs 87,352 crore allocated for 2019-20 for the same. The new allocation is 4.31% of the divisible pool. Of this sum, Rs 60,750 crore has been recommended for rural local bodies, and Rs 29,250 crore for urban local bodies. These grants will be made available to all three tiers of Panchayat- village, block, and district.
To promote local-level mitigation activities, the Commission has recommended the setting up of National and State Disaster Management Funds. Recommended grants for the State Disaster Risk Management Fund is Rs 28,983 crore, while the allocation for the National Disaster Risk Management Fund is Rs 12,390 crore.
Apart from these, guidelines for performance-based grants and sector-specific grants have been outlined. The Commission has recommended a grant of Rs 7,375 crore for nutrition in 2020-21. Sectors for which sector-specific grants will be provided in the final report include: (i) nutrition, (ii) health, (iii) pre-primary education, (iv) judiciary, and (v) railways.
For more details, please see our summary of the report.
The Union Cabinet approved the Model Tenancy Act, 2021 on June 2, 2021, for adoption by state and union territory governments. The Model Act has three primary objectives. First, it aims to regulate renting of residential and commercial premises by establishing conditions for tenancy, eviction, and management of the property. Second, in regulating tenancy, it proposes mechanisms to balance and protect the rights of landlords and tenants. Last, it proposes a three-tier adjudicatory mechanism consisting of Rent Authorities, Rent Courts, and Rent Tribunals for speedy adjudication of tenancy related disputes.
However, note that rental housing is regulated by states as land, land improvement, and control of rents falls under the State List of the Indian Constitution. This Model Act is only a proposed framework that states and union territories may alter when passing their own tenancy laws.
In this blog, we provide a background on the rental housing market and explain some issues with the 2021 Model Act.
Need for the Act
In India, 95% of households in rural areas live in self-owned housing, and rental housing is a predominantly urban phenomenon. Between 1951 and 2011, the urban population in India grew by six times and as of 2011, comprises 31% of the total population. This is projected to grow to 40% by 2036. However, the share of persons living in urban rental accommodation has decreased from 58% to 27% between 1961 and 2011. The 2015 draft National Urban Rental Housing Policy noted that urban areas face a significant housing shortage and stated that this cannot be addressed by home ownership. In 2012, a Technical Group studying urban housing shortage estimated the urban housing shortage to be at 1.9 crore units. The 2011 Census noted that between 6.5 crore to 10 crore people (17% to 24% of the urban population) live in unauthorised housing in urban areas. The Economic Survey (2017-18) noted that rental housing is a key way to address informality and shortage. It stated that rental housing enables mobility and affordability for low-income segments, who may not be able to purchase housing. It also observed that a significant portion of urban rental housing stock is vacant, attributing it to unclear property laws, poor contract enforcement, and rent control laws.
State governments regulate rental housing through various legislative tools including rent control laws. To prevent landlords from charging exorbitant rent and ensure affordable housing, these laws specify a ceiling on rent and put conditions on eviction of tenants. The 2015 draft Policy noted that rent control laws discourage private investment in rental properties. It observed that rent control laws also skew arrangements towards tenants and lead to more litigation. This has eroded the trust of landlords in the regulatory system. A significant share of the rental demand is addressed through alternate arrangements such as leave and license agreements and informal leases.
A model law to regulate tenancy was first proposed in 1992. The first draft Model Tenancy Act was released in 2015, which was adopted by Tamil Nadu. However, as of 2021, 20 states including Karnataka, Maharashtra, and West Bengal continue to have rent control laws. A few states including Madhya Pradesh, Jharkhand, and Chhattisgarh have repealed their rent control laws.
Besides its key objectives, the Model Act also seeks to ensure affordability, formalisation and increase private investment in the rental housing market. The framework proposed under the Model Act may address some of these concerns. However, experts have recommended supplementing this with other policy initiatives to meet these objectives. For instance, a 2012 Technical Group observed that about 96% of the urban housing shortage pertains to the Economically Weaker Sections (EWS) and Lower Income Group (LIG) categories. The 2015 draft Urban Rental Housing Policy noted that a repeal of rent control laws may increase private investment and availability of rental housing. However, it has recommended several other measures to ensure affordability of rental housing. These include: (i) provision of incentives such as tax exemptions and subsidies to tenants and home owners, (ii) encouraging public-private partnerships and residential rental management companies, and (iii) enhancing access to finance within the EWS and LIG sectors.
Concerns for right to privacy
The Model Act requires all landlord and tenants to intimate the Rent Authority about a rental agreement with a prescribed form. The form requires both the tenant and the landlord to submit their Aadhaar numbers and attach self-attested copies of the card with the form. This may violate a 2018 Supreme Court judgement, which states that requiring Aadhaar card or number can be made mandatory only for expenditure on a subsidy, benefit or service incurred from the Consolidated Fund of India. Registering a tenancy agreement does not entail these, therefore making Aadhaar number mandatory for registering a tenancy may violate the judgement.
The Model Act also states that tenants and landlords will be provided with a unique identification number after registering a rental agreement. Details of the agreement along with other documents will be uploaded on the Rent Authority’s website. It is unclear if personal details of the parties such as PAN and Aadhaar number, which must be submitted along with the agreement, will also be made available publicly. If these are shared on the website, this may violate the right to privacy of the involved parties. The Supreme Court has included the right to privacy as a fundamental right. This right may be infringed only if three conditions are met: (i) there is a law, (ii) the law achieves a public purpose, and (iii) the public purpose is proportionate to the violation of privacy. Sharing personal information of individuals may not serve a public purpose, and hence may violate the right to privacy of such individuals.
Dispute redressal
The preamble of the 2021 Model Act and the background note accompanying the 2020 draft Model Act state that it seeks to establish a speedy adjudication mechanism for disputes linked to tenancy agreements. The Model Act specifies the timelines for resolution of cases linked with eviction and payment of rent. However, timelines have not been specified for certain cases. For instance, no timeline has been specified within which the Rent Authority must resolve a dispute on withholding of essential services or revision of rent.
Specification of minute details
The Model Act seeks to balance the tenant-landlord relationship by specifying rights and duties of both parties. However, it also caps the maximum possible security deposit amount that a tenant must pay to the landlord. Further, a suggestive framework for the rental agreement also includes minute details on responsibility for repair and maintenance. If codified, these specifications may hinder flexibility in framing tenancy agreements.
For a PRS analysis of the Model Tenancy Act 2021, please see here.
