Fiscal Federalism in India Essay

India is the largest democracy with federal form of government. The financial arrangements in India catch evolved in a quasi-federal scheme to collect the takements of centimeralise planning in a mixed economy structure and their sources of taxation for both snapper and State were clearly demarcated with opine to the financial affinity and the responsibilities mingled with them. Our constitution provides residual powers to the nitty-gritty and halts clear division of financial powers mingled with the Centre and the State Governments. Through various source of tax to government, the physical composition of India provides for the establishment of a pay focussing for the purpose of aloneocation of real resources of revenue enhancement between the joint and the State Governments. The pay direction is established to a lower place Article 280 of the Constitution of India by the President. The Article 264 and 293 explain the financial relations between the Union a nd the State Government.Although the states have been assigned certain taxes which are levied and calm by them, they in addition share in the revenue of certain union taxes and there are certain opposite taxes which are levied and collected by the primaeval Government but whole coming back are transferred to the states. In India, the Centre-State financial relationship relates to the dispersal of power in resource mobilization between the Centre and States as also the sharing of step to the forego responsibilities. During the last decade the disparities widened among the States which became economic aloney and politically important. This situation resulted imputable to globalization and privatization by which certain States enjoy owing(p) advantages over the separate. The most important and buoyant revenue sources are assigned to the Union Government, tour major expenditure responsibilities rest with the State government, which take anguish of the social and economic sec tors.Hence, in the federal structure, there is the possibility of conflicts in sharing the revenue and expenditure of both the governments. While the State governments in India collects around one-third of the total tax revenue accruing to the government sector, their expenditure obligations are disproportionately high, accounting for three fourths of the aggregate social expenditure and more than one-half of the aggregate expenditure on economic services. To enable the States to carry fall out their expenditure respective responsibilities, the finance cathexis is assigned with the task of recommending the transfer of resources from theCentre to the States. financial imbalance Viz., good or even fiscal imbalance appears very often in the countries with de fundamentalized fiscal systems. Removal of these fiscal imbalances of the States by optimizing social welfare of the economy is to remove the fiscal balance in the inter-government transfers from the Centre by finance deputat ion entrusted in equalization of transfers of funds correspond to the economic requirement irrespective of the political parties ruling. The real challenge of whatever fede symmetryn is to eliminate intra-regional vertical and even fiscal inequalities. This paper analyzes these aspects of vertical and horizontal fiscal imbalance in federal India and the way out to the problem to development path.1. FISCAL FEDERALISMAs a subfield of normal economics, fiscal federalism is concerned with sense which functions and instruments are best centralized and which is best placed in the sphere of decentralized levels of government (Oates, 1999). In another(prenominal) words, it is the study of how competencies (expenditure side) and fiscal instruments (revenue side) are allocated crossways different (vertical) layers of the administ ration. An important part of its subject matter is the system of transfer payments or grants by which a central government shares its revenues with lower leve ls of government. As in the for the first time place defined by Musgrave (1959) and Oats (l972), fiscal federalism concerns the division of public sector functions and funds among different tiers of government.1.2 INTRODUCTION TO FISCAL FEDERALISM IN INDIAIndia has a federal form of government, and therefrom a federal finance system. The essence of federal form of government is that the Centre and the State Governments should be free of each provided with sources of raising adequate revenues to run through the functions entrusted to it. For the successful operation of the federal form of government financial independence and adequacy form the backbone. India possesses a federal structure with a clear tuberosity between the Centre and the States functions. India is the largest democracy with federal form of government. The fiscal arrangements in India have evolved in a quasi-federal system tomeet the requirements of centralized planning in a mixed economy framework. The foundi ng fathers of our Indian Constitution were deeply concerned about ensuring the unity and integrity of the country. They were aware of the forces of kerfuffle and disunity working within the country. The dangers at the time of independence were handled by a strong government at the Centre.1.3 HISTORY OF FISCAL FEDERALISMIndian federal system is about sixty divisions old, compared to more than two centuries of the United States or Switzerland or Canada. The federal character of public finance in India has its origin as far as the seventies of the last century. Although at that time the country had a unitary form of government, some division of functions and financial powers between the focalize and the state was found administratively desirable. Ever since past the arrangements have been revised and improved from time to time. financial federalism entails the division of responsibilities in respect of taxation and public expenditure among the different layers of the government, n amely the Center, the states and the local bodies.1.4 OBJECTIVE OF FISCAL FEDERALISM pecuniary federalism helps governmental organization to realize cost efficiency by economies of scale in providing public services, which corresponds most closely to the preference of the people. From the point of view of economy, it creates a unified common market, which promotes greater economic activity. The federal system has served extremely good for India to promote their democracy, to strengthen the national unity and to achieve economic progress to the nation completely.1.5 REASON OF FISCAL FEDERALISM IN INDIAFiscal structure provides balanced sources of revenue and expenditure .Fiscal challenges of vertical and horizontal imbalances play an important role to balance the fiscal condition between the steels. To overcome the fiscal redressed our Constitution has created an institution called the Finance Commission, which is an independent Constitutional body, appointed after all five years.2 LEGISLATIVE LISTThe Seventh Schedule (Article 246) delineates the subject matter of rightfulnesss train by the Parliament and by the Legislatures of the states and indicates the* Union List (List I)* states List (List II)* Concurrent List (List tierce).2.1 UNION LISTList I invests the union with all functions of national richness such as defense, external affairs, communications, constitution, organization of the Supreme Court and the high courts, elections etc.2.2 STATES LISTList II invests the states with a number of important functions speck on the life and welfare of the people such as public order, police, local government, public health, agriculture, land etc.2.3 CONCURRENT LISTList III is a concurrent List, which let ins administration of justice, economic and social planning, trade and commerce, etc.2.4 IMPORTANCE OF LEGISLATIVE LISTSAccording to Article 246, Seventh Schedule, Parliament has exclusive powers to take laws determineing matters enumerated in List I, not withstanding the provisions of the other clauses of this Article. On the other hand, the Legislature of any state has exclusive power to make laws for the state regarding any of the matters enumerated in List II, subject to other clauses. With regard to List III, both the Parliament and a State Legislature can make laws but the law listed in I or III, vests with the Union. Thus, the Union has supremacy over a wide range of the legislative field.These lists include the powers of taxation also. The union List includes among others, taxes on income other than agricultural income, move duties, customs and corporation tax. The State list includes land revenue, excise on Alcoholic liquors, tax on agricultural incomes, body politic craft, taxes on sale or purchase of goods, taxes on vehicles, on professions, on luxuries, on entertainment, on stamp duties, etc. the concurrent list does not include any important taxes.3 pay COMMISSION OF INDIAThe Finance Commission of India came into exi stence in 1951. It was established under Article 280 of the Indian Constitution by the President ofIndia. It was formed to define the financial relations between the centre and the state. The Finance Commission Act of 1951 states the terms of qualification, appointment and disqualification, the term, eligibility and powers of the Finance Commission. As per the Constitution, the electric charge is appointed every five years and consists of a chairman and four other members. Since the institution of the first finance cathexis, stark changes have occurred in the Indian economy causing changes in the macroeconomic scenario. This has led to major changes in the Finance Commissions recommendations over the years. Till date, Thirteen Finance Commissions have submitted their explanations.3.1 FUNCTIONS OF FINANCE COMMISSIONFunctions of the Finance Commission can be explicitly stated as * dispersion of net proceeds of taxes between Centre and the States, to be divided as per their respect ive partings to the taxes. * Determine factors governing Grants-in Aid to the states and the magnitude of the same. * Work with the State Finance Commissions and suggest measures to augment the Consolidated Fund of the States so as to provide superfluous resources to Panchayats and Municipalities in the state.3.2 Procedures and Powers of the CommissionThe Commission has the power determine their own procedure and * Have all powers of the civil court as per the Court of Civil Procedure, 1908. * Can summon and enforce the attendance of any witness or ask any person to deliver information or produce a document, which it deems relevant. * Can ask for the production of any public record or document from any court or office. * Shall be deemed to be a civil court for purposes of Sections 480 and 482 of the Code of Criminal Procedure, 1898.3.3 CONSTITUITIONAL POSITION OF FINANCE COMMISSIONAccording to the word 280 of the constitution finance commission is established to care the revenues between the states and center and among the states. Article 280 finance commission1. The president shall within two years from the commencement of this constitution and thereafter at the expiration of every fifth year or at suchearlier time as the president considers necessary, by order constitute a finance commission which shall consist of a chairman and four other members to be appointed by the president. 2. Parliament may b law determine the qualification which shall be requisite for appointment as members of the commission and the manner in which they shall be selected. 3. It shall be the vocation of the commission to make recommendations to the president as to a. The distribution between the union and the states of the net proceeds of taxes which are to be, or may be, divided between them under this chapter and the allocation between the states of the respective shares of such proceeds.3.4 THERTEEN FINANCE COMMISSIONS OF INDIA3.4.1 First Finance CommissionThe First Finance Co mmission was appointed by the President on November 20, 1951, which was chaired by Mr. K.C. Neogy. Other members of the commission included Mr. V.P. Menon, Mr. R. Kaushalendra Rao, Dr. BK Madan and Mr. M.U. Rangachari. After Mr. V.P. Menons resignation on February 18, 1952, Mr. V.L. Mehta was appointed as a member. The commission was asked to make recommendations regardingRecommendations* Allocations of income tax and Union Excise Duties and tax sharing. * Amounts payable as Grants- in-Aid to the States in need of Assistance under the substantive portion of Clause 1 of Article275. * Grants-in-Aid to certain States in topographic point of their share of export duty on jute and jute products according to Article 273 Continuation or adjustment of the terms of agreement with Part B States under Article 278 (1) or under Article 306. upright distribution* The share of States in the proceeds of income tax was to be 55 per cent.* The share of centre was 45%.* The First Commission recommen ded that shares of States in the Union excise duties be 40 per cent of the proceeds of the tax on three commodities, 25 per cent of the proceeds of the tax on eight commodities and 20 per cent of the proceeds of the tax on 35 commodities, respectively.Horizontal distributionAs far as Horizontal scattering is concerned, following formula was followed for revenue distribution among the statesDistribution formula* Population 80%.* Residual weight age of 20% given to contribution.No recommendations regarding grants for meeting capital requirements of the state were do by the commission. The Commission provided Grants in- Aid (under Article 273) to only four states, namely, Assam Bihar, Orissa and West Bengal. However, Grants were provided to many states under Substantive Portion of Article 275 (1) and under the head of Primary genteelness grants.3.4.2 Second Finance CommissionThe Second Finance Commission was constituted by President Rajendra Prasad, on June 1, 1956. The Commission w as chaired by Shri K. Santhanam and consisted of Shri Ujjal Singh, Shri L.S. Misra (Retired Chief Justice, Hyderabad), Shri M.V. Rangachari and Dr. B.N. Ganguli, as its other members.The Commission was asked to make the following recommendationsRECOMMENDATIONS* Grants-in-Aid to certain States, in need of assistance under Article 275, having regard to the requirements of Second Five Year end and the efforts made by those states to raise additional revenue. * Allocation of Estate Duty and Tax on Railway Passenger Fares proposed to be levied by the Railway Passenger Fares Bill, 1957, introduced in the Lok Sabha on 15 May 1957. * Grants-in-Aid to the States of Assam, Bihar, Orissa and West Bengal, to compensate for their share of the export duty on jute and jute products as per Article 273. * The principles which should govern the distribution under obligate 269 of the net proceeds of estate duty in respect of property other than agricultural land, levied by the Government of India in the States within which such duty is leviable.* Revisions, if any, of the rates of interest on loans made by the Centre to the States between August 15, 1947 to March 31, 1956 and their terms of repayment. The phenomenal growth of the Union loans to the States justified such adjustments. * Apportionments of the net proceeds of the additional Excise Duties proposed to be levied in view of States Sales Taxes on the mill made textiles, sugar and tobacco, and the amounts which should be assured to the States as the income now derived by them from the charge on these commodities and the States Sales Tax (which is to be replaced by the additional duty of excise).vertical distributionDespite the receding contribution by the Income Tax to the devolution of revenue to the States, the Commission recommended an increase in the per cent of the net proceeds to the States from 55 to 60, and the share of the Union Territories should be 1 per cent. constituent of centre was 40% to 45%.Horizontal distributionIt was recommended that the distribution of the share of Income tax among the States should be 10 per cent on the buttocks of battle array and 90 per cent of the basis of population, thereby giving greater importance to population than it was earlier. As far as the allocation to the States from the Union duties of excise on matches, tobacco, vegetable products, tea, coffee, sugar, paper and vegetable non-essential oils was concerned, the Commissionconsidered that it should be 25 per cent.3.4.3 The Third Finance CommissionThe Third Finance Commission was appointed in the year 1960, for the period 1960-64, by the President and was chaired by Shri A.K. Chanda and the its members were - Shri Govinda Menon, Shri Dwijendra Nath Roy, Prof. M.V. Mathur, Shri G.R. Kamat, Member Secretary. The Commission was asked to make recommendations to the President with regard to the following- * On account of Tax sharing between the Centre and the State and allocation of Income Tax and key Excise Duties.* Under Article 275, Grants-in-Aid to States in need of assistance, other than the sums specified in the provisos to Clause of article 275 a) With regard to the requirements of third five-year plan b) Secondly, with regard to the efforts to be made by those states to raise additional revenue amount . * Allocation of duties, namely, additional excise duty and estate duty. * The manner of distribution of adhoc Grants in-lieu of tax on Railway Passenger Fares With regard to the TOR the following were the recommendations made by the FC- The Finance Commission recommended the formulation of an independent commission to assess the tax potential of each state. horizontal distributionIncome Tax With regard to the divisible pool of income tax among the states the FC adopted the criterion of the first FC that 80% be distributed on the basis of population and 20% on the basis of collection. The recommended constituent share of the states in divisible pool of the Income Tax M aharashtra 13.41, Bihar 9.33, Punjab 4.49, Uttar Pradesh 14.12, Kerala 3.55 Union Excise Duty With regard to the distribution of the proceeds of UED the FC decided to cover all commodities on the existing list. It recommended that 20% of the net proceeds of UED on all commodities on which such duties were collected and the yield of which exceeded Rs. 50 lakhs in1960-61 should be allocated to the state. Vertical distributionCommission recommended an increase in the per cent of the net proceeds to the States from 60% top 75%.share of centre was reduced to 35% to 40%.revenue distribution formulaThe share of each state in the distribution of UED was opinionated by the Commission on the basis of population and it rejected consumption as the basis of distribution due to two major reasons A. Reliable entropy on consumption wasnt available.B. As it would have given advantage to the more urbanized and financially stronger states. Percentage share of the 20% of proceeds of the UED for certain major states were- Maharashtra 5.73, Bihar 11.56, Punjab 6.71, Uttar Pradesh 10.68, Kerala 5.46 Additional Duties of Excise The GOI in consultation with the state governments, decided that an AED be levied on mill-made textiles, sugar, tobacco, rayon among others and the net proceeds of which should be distributed among them subject to then income derived by each state being assured to it. The Commission rejected this contention as the rates of sales taxes had been revised by them since then.The commission distributed the guaranteed amount of Rs. 32.54 crores among the States and the be amount was distributed, first, on the basis of the percentage increase in the collection of sales tax in each state since 1957- 58 when AED were imposed and then on the basis of the population. The Act imposing a tax on the railway passenger fares was repealed after the Third Finance Commission had been constituted. Hence, the commission was asked to make recommendations on the principl e on which the ad hoc grant should be distributed among the states. The commission adopted the principle of compensation based on which the grants should be distributed.3.4.4 The Fourth Finance Commission of IndiaThe Fourth Finance Commission was constituted on May 18, 1964, under the chairmanship of Dr. P.V. Rajamannar. Other members of the Commission included Shri Mohan Lal Gautam Shri D.G. Karve Prof. Bhabatosh Datta Shri P.C. Mathew, Member Secretary. The Commission suggested in its report that there should be greater co-ordination between the Centre and the States in common financial interests for which it recommended the establishment of a permanent organization in the Ministry of Finance.RecommendationsHorizontal and vertical distributions were similar to the third finance commission. The changes to be made in the principles governing thedistribution of the net proceeds in any financial year of the additional excise duties levied on commodities, namely, cotton fabrics, silk f abrics, woolen fabrics, sugar and tobacco- in replacement in the States tax formerly levied by the state governments.3.4.5 The Fifth Finance Commission of IndiaThe Fifth Finance Commission was constituted by the President of India on March 15, 1968. The Terms of Reference of the Fifth Finance Commission were wider than those of the earlier ones. asunder from the matters referred to in the earlier Commissions, this Commission was required to * Examine the desirability or otherwise of maintaining the existing arrangements in regard to additional excise duties levied in lieu of Sales Tax and the scope for extension of such arrangements to other items. * To inquire into the unauthorized overdrafts of the States and recommend the procedure for avoiding such overdrafts.* Examine the scope for raising revenue from taxes and duties mentioned in Article 269, the scope for States in raising additional revenue from their sources as well their scope for better fiscal management and economy in expenditure, and make a comprehensive study of the States expenditure on various subjects. * Grants-in-aid recommended under Article 275 (1) are to be for purposes other than the requirements of the Five Year Plan, and while making its recommendations, the Commission was called upon to have regard to the resources of the Central Government and the demands thereon on account of expenditure on civil administration, defense, debt servicing, etc. * The Commission was asked for the first time to indicate the basis of its findings and make available relevant information. Since then these were made clear in the Terms of Reference of every consequent Finance Commission.3.4.6 The Sixth Finance Commission of IndiaThe Sixth Finance Commission was incorporated in the year 1973 consisting of Shri K. Brahmananda Reddi as the chairman and the following four other Members, namely-Shri Justice Syed Sadat Abal Masud, Dr. B.S. Minhas, dr. I.S. Gulati, Shri G. Ramachandran, Member Secretary.Recommenda tionsThe States demanded the inclusion body of corporation tax into the divisibleincome tax and 1005 allocation of the net proceeds to them. The commission expressed that such inclusion was constitutionally forbidden but it can be reviewed by National Development Council.vertical distributionStates share was increase from 75% to 80% due to the decrease in the divisible pool as the arrears of the advance tax collection had been cleared. Share of centre was reduced to 25% to 30%.3.4.7 The Seventh Finance Commission of IndiaIntroductionThe Seventh Finance Commission was incorporated in the year 1978 consisting of Shri J.M. Shelat as the chairman and the following four other Members, namely-Dr. Raj Krishna Dr. C.H. Hanumantha Rao Shri H.N. jibe Shri V.B. Eswaran, Member Secretary.Vertical distributionThe share of the states in the net proceeds should be raised to 85% excepting the share of the Union Territories which would be 2.19% of net proceeds. Share of centre was reduced to 15%.H orizontal distributionThe inter distribution between the states should include 10% contribution factor and rest 90% would be on basis of population.3.4.8 one-eighth Finance Commission of IndiaThe Eighth Finance Commission was constituted by the President of India, on April 28, 1984 under the chairmanship of Shri Y.B. Chavan. The commission also consisted of the following members Shri Justice Sabya Sachi Mukherjee Dr. C.H. Hanumantha Rao Shri G.C. Baveja Shri A.R. Shirali Shri Justice T.P.S. Chawla Shri N.V. Krishnan, Secretary.It was asked to make recommendations on * The distribution of net proceeds of taxes between the union and the states which are to be or may be divided between them under chapter 1 of Part XII of the constitution and allocation between the states of the respective shares of the same The principles which govern the grants in aid of the revenues of the states out of the Consolidated Fund of India and the amount to be paid to the needy States which seeks assistanc e by way of grants in aid of their revenues under Article 275 of the constitution for purposes other than those specified in the provisions toclause (i) of that article.* The commission is to examine the possibility for increasing revenue from the taxes and duties mentioned in article 269 of the constitution but which are not levied at present. It will probe into the scope for enhancing revenue from the duties mentioned in the article 268. Making an assessment of the non plan capital gap of the states on a consistent and comparable basis for the 5 years ending with 1988-89 also comes under its agenda. It will review the policy and arrangement in regards to the financing of relief expenditure by the States affected by natural calamities and make appropriate suggestions. The commission shall make its report by October 31, 1986 on each of the matters aforesaid. The major objective of the Eighth Finance Commission was to reduce interstate disparities through their scheme of devolution.3 .4.9 The Ninth Finance Commission of IndiaThe Ninth Finance Commission was set up in June 1987 under the chairmanship of Mr. N.K.P Salve along with the following members Shri Justice Abdus Sattar Qureshi Dr. Raja J. Chelliah Shri Lal Thanhawla Shri Mahesh Prasad Shri S. Venkitaramanan Shri Venkitaramanan Shri R. Keishing Shri K.V.R. Nair. The commission has been asked to adopt a normative approach in assessing the receipts and the expenditures on the revenue account not only of the states but also of the centre with due regard to the special problems of each state and the special requirement of the centre. Generating surpluses on revenue account of both the states and centre for capital investment should also be considered.Changes in the principles that govern the distribution between the union and the states and also the states inter se of the net proceeds of central taxes are to be made. The commission will also make recommendations regarding the principles which should govern the grants in aid of the revenue of the state out of the Consolidated Fund of India. It is to assess the debt position of the states as on March 31, 1989 and suggest corrective measures. In regard to the financing of the relief expenditure by the states affected by natural calamities the commission is to examine the feasibility of establishing a National Insurance Fund to which the state governments may contribute a percentage of their revenue receipts. The governments decision to accept all the major recommendations of this commission which would bring substantial benefits to the stateduring the eighth five-year plan period (especially in relation to debt relief) shows the upper hand enjoyed by this body.3.4.10 The ten percent Finance Commission of IndiaThe Tenth Finance Commission was incorporated in the year 1995 consisting of Shri Krishna Chandra Pant as the Chairman and the following four other Members, namely Dr. Debi Prosad Pal, Member of Parliament, Member Shri B.P.R. Vithal, Member Dr. C. Rangarajan, Member Shri M.C. Gupta, Member Secretary.RecommendationsThe share of the Union Territories would not be goaded on the grounds used for state share but it would be decided on the basis of population solely. The percentage would be 0.927% for the years 1995-2000. The proceeds from the penalties and interest recover under the miscellaneous receipts should be included in to the divisible income tax pool as recommended by Ninth commission with effect from 1 April 1995. Vertical distributionThe share of the net proceeds would be 77.5% for five years was given to states and 23.5% share was given to centre.HORIZONTAL DISTRIBUITIONDistribution of the net proceeds among states would be as follows-* 20% on the basis of population of 1971* 60% on basis of distance of per capita income* 5% on basis of area adjusted* 5% on basis of infrastructure index* 10% on basis of tax effort3.4.11 The Eleventh Finance Commission of IndiaThe Eleventh Finance Commission was appointed by the President on July 3, 1998 for the period 2000-05.It was chaired by Prof. A.M. Khusro and its members were Shri N.C Jain, Shri J.C Jetly, Dr. Amaresh Bagchi, Shri T.N. Srivastava The Commission was asked to make recommendations to the President with regard to the following- * With regard to Chapter I of Part XII of the Constitution, the distribution between the Centre and the States of the net proceeds of taxes and the allocation between the States of the shares ofthese proceeds.* The principles governing the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and with regard to article 275- the sums to be paid to the States which are in need of assistance by way of grants-in-aid of their revenues for purposes other than those specified in the provisos to clause (1) of that article. * With regard to the recommendations made by the Finance Commission of the State the measures needed to augment the Consolidated Fund of a State to supplement the re sources of the Panchayats and Municipalities in the State. * Suggestions for a restructuring of the public finances so as to restore budgetary balance and maintain macro-economic stability.Vertical distributionThe total share of the States in the net proceeds of central taxes and duties would be 29.5 per cent for the next five years. Share of the centre was 71.5%.3.4.12 The Twelfth Finance Commission of IndiaThe Twelfth Finance Commission was appointed on 1 November 2002 to make recommendations on the distribution of net proceeds of sharable taxes between union and states. The commission was headed by veteran economist of India, C. Rangarajan. The commission submitted its report on 30 November 2004 and covered the period from 2005 to 2010.Major Recommendations of 12th Finance Commission* Macro-economic stabilityThe total Fiscal Deficit for Centre & states to be reduced to 3% of GDP. The total tax-GDP ratio of both centre& states to be increased to 17.6% of GDP in 2009-10. The revenu e deficit for the centre& states combined to be reduced to 0% by 2008.* Distribution of Union TaxThe total share of states in the total sharable central taxes to be fixed at 30.5% and the share of states will come down to 29.5% if the states levy sales tax on sugar, textiles & tobacco.* Grants to local bodiesThe total grant that will have to given to the states for panchayati raj institutions and local urban bodies for the period of 2005-09 will be Rs20000 crores& Rs 5000 crores respectively.* casualty Relief FundThe calamity relief fund scheme will continue as it was in the previous plans with central & states contributing in the ratio of 75 25. The size of fund will be Rs 21333 crore for the period of 2005-10..3.4.13 thirteenth Finance Commission1. The share of states in the net proceeds of the shareable Central taxes should be 32%.This is 1.5% higher than the recommendation of 12th Finance Commission. 2. Revenue deficit to be progressively reduced and eliminated, followed by rev enue surplus by 2013-14. 3. Fiscal deficit to be reduced to 3% of the GDP by 2014-15. 4. A target of 68% of GDP for the combined debt of centre and states. 5. The Medium Term Fiscal Plan(MTFP)should be reformed and made the statement of commitment rather than a statement of intent.6. FRBM Act need to be amended to mention the nature of shocks which shall require targets relaxation. 7. Both centre and states should conclude Grand Bargain to implement the model Goods and Services Act(GST).To incentivise the states, the commission recommended a sanction of the grant of Rs 50000 crore. 8. Initiatives to reduce the number of Central Sponsored Schemes(CSS)and to restore the predominance of formula based plan grants. 9. States need to address the problem of losses in the power sector in time funk manner.3.5 CURRENT REVENUE SHAIRING FORMULAThe scope of the FCs broadened over time as they were assigned several other issues on government finances, particularly those relating to augmentation of State integrating Funds to supplementing the resources of local bodies and debt-related issues. The approach of successive FCs varied as they addressed concerns raised by States from time to time regarding the composition of the divisible pool of central taxes and inter se distribution criteria. Recent constitutional changes have simplified the sharing arrangement of the divisible pool of Central taxes by clubbing all shareable Central taxes and excise duties. While determining the formula for horizontal distribution of inter se shares of States, various FCs attempted to correct the differentials in revenue capableness and cost disability factorsinherent in the economies of States, while trying to foster fiscal efficiency at the State level.However, differences have been noticed in selection, interpretation and weight of variables that have been used by FCs to prescribe the devolution formula for Central taxes. More recently, the Thirteenth FC has placed greater emphasis on fi scal capacity distance and fiscal discipline, which is expected to facilitate greater convergence among the States. The pattern of transfers through the FC channel shows that the share in Central taxes has persistently been the overriding component of revenue sharing since the First FC. As far as the extent of equalization is concerned, an analysis of transfers as recommended by four successive FCs (from the Tenth to the Thirteenth) shows that it was the highest in the case of the Eleventh FC as the gap between recommended and benchmark transfers was minimum.Fiscal distance index is aimed at equalizing amongst the states the resource envelope for supplies of public services, while the fiscal efforts index is to minimize the moral hazard in such equalization payouts by incentivizing the tax efforts of the states. Area and population are indicative of the fiscal needs of the states. Such an institutional arrangement has served the country well. The reports of all past twelve Finance Commissions were unanimously accepted by the Parliament and the country The horizontal distribution is considered with certain basic formula, where the formula is based on objective and transparent parameters. The preferred parameters are* area* population* fiscal efforts index* Fiscal distance index