States must amend laws for fiscal breach

NEW DELHI: The 15th Finance Commission on Friday indicated that its plan to provide an “escape clause” to states to allow for half-a percentage point breach in fiscal deficit target may come only if the states agreed to amend their respective Fiscal Responsibility and Budget Management laws and bring them in line with the Centre’s legislation.

“This is not a one way street. Flexibility and options invariably come with conditions namely, states need to replace their existing FRBM legislations by adopting key features of the FRBM rules in the Finance Bill of 2018... Among the conditions for triggering the escape clause is also the obligation to stipulate the return trajectory. States will have to be mindful because they cannot cherry pick best of both worlds,” 15th Finance Commission (FFC) chairman NK Singh told TOI after a meeting with International Monetary Fund’s first deputy managing director David Lipton on Friday.

During the meeting, the issue of inadequate revenue to public outlays particularly capital spending in infrastructure came up and there were suggestions for significant changes in the direct tax architecture. When reached for comment, Singh suggested that there was a need for low rates and fewer exemptions, while reducing the number of slabs.


“The direct tax to GDP and the declining realisation from income tax, notwithstanding much higher buoyancy, needed recalibration. The tax base as it has been significantly reduced by leaving out the agriculture sector and the continuity of multiple exemptions have reduced the overall tax realisation. Also, of late, the number of rates have increased which makes compliance more onerous. Significant rate rationalisation could make a meaningful difference. You cannot have a regime of low rates and high exemptions. The early introduction of a more simplified Direct Tax Code would be beneficial,” Singh said, when reached for comment.

In the Budget, finance minister Nirmala Sitharaman has proposed an option that will do away with exemptions, while lowering the liability for those who have few allowances or do not claim tax breaks, but comes with multiple slabs. While the scheme has been criticised, the tax department has defended the proposal.

Even goods and services tax, introduced two-and-a half years ago, faces similar criticism, something that the FFC’s advisory council discussed on Thursday.