With Jammu and Kashmir set to lose its statehood, it would not be eligible for any share of tax devolution from the Centre’s divisible pool as decided by the finance commission, leaving fund allocation entirely in the hands of the Central government.
“Jammu and Kashmir will lose its financial autonomy, and it does not augur well for fiscal federalism,” said an ex-member of a previous finance commission. Funds for Union territories (including Delhi, Puducherry, etc) are decided by the Central government in the Union Budget and voted by Parliament.
The Finance Commission (FC) recommends how tax revenues collected by the Central government should be shared between the Centre and the states. Further, it also recommends inter se distribution of these resources among states.For the five years ending 2019-20, the Union Finance Ministry had agreed to the Fourteenth Finance Commission’s recommendations that 42 per cent of tax collections (compared with 32 per cent recommended by the Thirteenth Finance Commission for the previous five years ending 2014-15) by the Central government should go to states. Of the states’ share, the Commission had recommended that Jammu and Kashmir should receive 1.854 per cent from 2015-16 till 2019-20. This was higher than 1.551 per cent the state received during the previous five years.
Jammu and Kashmir was one of the few states that was accorded a special category status by the Central government. Almost 30 per cent of the devolution was earmarked for these states. Further, they favourable treatment in terms of the grant versus loan mix compared with other states.
The Fourteenth Finance Commission did not have make specific recommendations for these states with special category status, but accounted for their special characteristics by assigning weightage to forest cover and international border lengths in allowing for higher devolution. “Special category status is not really a Constitutional category,” said another former member.
According to sources close to the development, the Fifteenth Finance Commission chaired by NK Singh, may have to rework its calculations for horizontal devolution (sharing of resources among states) with the change in status of Jammu & Kashmir’s statehood. The state is proposed to be organized into two Union Territories – Jammu & Kashmir (with Legislative Assembly) and Ladakh (without Legislative Assembly). “Instead of 29 states, devolution would be for 28 states. They will have to redo the arithmetic,” said a source, who did not wish to be named.
The Union Cabinet had on July 17 approved a proposal to extend the tenure of the Fifteenth Finance Commission by six more months. It is expected to now submit its report by November end 2019. Members of the Commission have completed visits to various states for consultation with stakeholders, including state government functionaries.