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Fiscal Concerns Ahead of 16th Finance Commission’s Review
Context:
As the 16th Finance Commission prepares to assess public finance, the Comptroller and Auditor General of India (CAG) has raised critical concerns, particularly the decline in states’ own tax revenue (SOTR) buoyancy.
Finance Commission
The Finance Commission is a constitutional body established by the President of India under Article 280 of the Indian Constitution. Its primary role is to define the financial relations between the central government and the state governments, ensuring equitable distribution of resources.
Key Functions:
- Distribution of Taxes: The commission recommends how the net proceeds of taxes should be divided between the Union and the States.
- Grants-in-Aid: It determines the factors governing grants-in-aid to states and their magnitude.
- Local Governance Support: It suggests measures to augment resources for panchayats and municipalities.
- Sound Finance: It advises on maintaining sound financial practices.
Composition and Appointment:
- Chairman and Members: The commission consists of a chairman and four other members.
- Qualifications: Members are selected based on their experience in public affairs, judiciary, government finances, administration, or economics.
- Appointment: Members are appointed by the President, with terms specified by the President.
Recent Commissions:
- 15th Finance Commission: Constituted in 2017, chaired by N.K. Singh, with recommendations for the period 2020-26. Key recommendations included a 41% share of central taxes for states.
- 16th Finance Commission: The most recent commission was constituted on December 31, 2023, chaired by Arvind Panagariya.
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- The Commission is expected to submit its recommendations by October 31, 2025, outlining the central tax devolution formula and grants-in-aid to states for the five-year period beginning April 1, 2026.
- The CAG emphasised the need for more effective revenue collection mechanisms, given the disparities in SOTR and non-tax revenue across states.
- Additionally, the CAG stressed the importance of regular reporting on off-budget borrowings, adherence to the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, and consideration of post-audit liabilities highlighted in its reports.
- These insights will be crucial in the Commission’s evaluation of fiscal consolidation for the Centre and states.
Comptroller and Auditor General of India (CAG)
The Comptroller and Auditor General of India (CAG) is a constitutional body established under Article 148 of the Indian Constitution. It is the supreme audit institution responsible for ensuring accountability and transparency in the financial management of the government.
Key Functions and Powers:
- Audit Responsibilities: The CAG audits all receipts and expenditures of the Government of India and the State Governments, including those of autonomous bodies and corporations substantially financed by the government.
- Types of Audits: Financial Audit, Compliance Audit, Performance Audit.
Appointment and Independence:
- Appointment: The CAG is appointed by the President of India.
- Independence: The CAG’s duties and powers are defined by the Comptroller and Auditor General of India (Duties, Powers, and Conditions of Service) Act, 1971.
- Security of Tenure: The CAG has a secure tenure to ensure independence, serving for 6 years or until the age of 65, whichever is earlier. The CAG can be removed from the office in the same manner as the judge of supreme court of India i.e. on the grounds of proved misbehaviour and incapacity.
More Findings
- Jurisdiction: The audit jurisdiction of the CAG extends to the Union government, states, local bodies, and public sector enterprises (PSEs).
- It is also responsible for maintaining the accounts of the states.
- Untapped Sources: The presentation highlighted untapped revenue sources, particularly in areas such as stamp duty, registration fees, and state excise collections.
- Recommendations: Key recommendations included periodic updates to market value guidelines, improved classification of property types, and the adoption of modern technology—such as sensor-based systems and QR codes—to minimise revenue leakages and enhance data accuracy.
- GST: To enhance GST administration, the CAG proposed several reforms aimed at expanding the tax base and improving transparency.
- The recommendations included incorporating unregistered goods and service providers into the GST framework through automated data collection and real-time information systems, as well as refining taxpayer verification processes.
- Accounting Practices: The CAG also underscored the need for standardised accounting practices across all levels of government to enhance transparency and comparability of fiscal data.
- It recommended the harmonisation of expenditure classifications and the adoption of a uniform six-tier classification system by state governments.
- As an initial measure, the CAG suggested aligning local body accounts with central and state accounts in the top 100 cities to facilitate seamless fiscal data consolidation and improve transparency in public financial management.
- Budget Stabilisation Fund: Furthermore, the CAG proposed the establishment of a Budget Stabilisation Fund in jurisdictions with surplus revenues as a prudent fiscal measure.
