J&K Reorganisation, Fund For Internal Security Makes Finance Commission’s Job Tough

The reorganisation of Jammu and Kashmir and creation of a dedicated fund for defence and internal security has made 15th Finance Commission’s job complex, with the government expected to give another extension to the panel for submitting its report on apportioning revenues.

The 15th Finance Commission headed by NK Singh is awaiting further change in its terms of reference from the President after the status of Jammu and Kashmir and Ladakh was changed to a union territory, according to a person with direct knowledge of the matter.

According to Jammu and Kashmir Reorganisation Act 2019, the distribution of taxes suggested by the 15th Finance Commission to the state will have to be apportioned to the union territories of Jammu and Kashmir and Ladakh. According to the law, the President, “on the appointed day”, has to make a reference to the Finance Commission for distribution of taxes to the two union territories. The appointed day is Oct. 31, when the state was officially split into two union territories, and the Finance Commission is yet to receive a communication from the President, the person cited earlier said.

The panel will need more time to study this in detail as only states are entitled to net proceeds of taxes, and union territories receive grants from the central government, the person said. The Finance Commission is said to have sought an extension from the government to submit its recommendations as bifurcation of Jammu and Kashmir and Ladakh is a unique case of a state being converted into a union territory and is governed by a separate Act of the Parliament, the person said.

The 15th Finance Commission, which was given a month’s extension earlier, has to submit its report by Nov 30. It’s currently facing “issues” related to apportionment of taxes, review of disaster management funds, and measures needed to augment the Consolidated Fund of a State to supplement the resources of panchayats and municipalities, the person cited earlier said.

The Finance Commission would consider submitting its interim suggestions, however, that would depend on the revised terms of reference that the panel will receive from the government. The panel has to submit its report by Nov. 30, covering a period of five years from April 1, 2020.

‘Not The First Time’

“The 15th Finance Commission will most likely recommend a continuation of the 14th Finance Commission’s award, after adjusting the aggregate amount due to the states for the conversion of Jammu and Kashmir into two union territories,” said Indira Rajaraman, member of 13th Finance Commission.

This wouldn’t the first time a continuation of the previous finance commission’s suggestions would be recommended for an interim period. The ninth finance commission had submitted two reports to the government—the first covering the one-year period from April 1, 1989, and the second covering a period of five years from April 1, 1990, according to the ninth finance commission’s report.

“Our report for the year 1989-90 should be viewed, by and large, as a continuation of the report of the last Commission,” the report said. “We have deliberately refrained from making radical departures so as to upset the on-going arrangement in the terminal year of the Seventh Plan although we are quite aware of the wider scope of our work.”

According to NR Bhanumurthy, a professor at National Institute of Public Finance Policy, the 14th Finance Commission also faced almost similar issues when Andhra Pradesh was bifurcated into Andhra Pradesh and Telangana. The government should decide whether Jammu and Kashmir should be considered as a part of the central finance commission’s devolution package, Bhanumurthy told BloombergQuint. Once there’s clarity, the Finance Commission should not take much time to submit its report, he said.