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 Explanatory
Memorandum as to the action taken on the recommendations made
by the Seventh Finance Commission in its Report submitted
to the President on the 28th October, 1978
The Report of the Seventh Finance Commission,
together with this explanatory memorandum as to the action
taken on the recommendations of the Commission, is being laid
on the Table of the House, in pursuance of article 281 of
the Constitution. A summary of the Commission's main recommendations,
relating to devolution of taxes and duties to the States,
grants-in-aid under article 275 of the Constitution, financing
of relief expenditure and debt relief to the States, is summarised
in Chapter-13 of its Report.
A-Shares of Central taxes and duties
The Commission's recommendations, covering
a period of five years commencing from the first day of April,
1979, relating to sharing of income tax, Union excise duties,
additional excise duties in lieu of States' sales tax, estate
duty on property other than agricultural land as also payment
of grants in lieu of the repealed tax on Railway passenger
fares and on account of wealth tax on agricultural property,
have been accepted.
B-Grants-in-aid of the revenues of
States under the substantive provision of article 275 of the
Constitution
(a) Grants-in-aid to cover non-Plan gap on
revenue account. Government have accepted the recommendation
of the Commission for payment of grants-in-aid of the revenues
of certain States, under the substantive provision of article
275(1) of the Constitution, towards meeting their non-Plan
revenue gap, as assessed by the Commission, for the five years
1979-84, amounting in all to Rs. 1173.12 crores.
In recommending payment of grants-in-aid
amounting to Rs. 1173.12 crores, referred to above, the Commission
could not compute the net interest liability of the States
arising out of their fresh borrowings and lendings during
the five years 1979-84. The Commission has recommended that
the Central Government should, from year to year, compute
in relation to each of the years 1979-84, the net interest
liability of the States arising from their fresh borrowings
and lendings and that, thereupon, the President should be
moved to increase, to the extent required, the amounts of
the grants-in-aid recommended by the Commission for the 8
States and, in the case of the other States, the net interest
liability so computed should be set off against the surplus
as assessed by the Commission and the net deficit, if any,
should be give as grants-in-aid to the States concerned by
Presidential Order under article 275(1) of the Constitution.
Government have accepted this recommendation and necessary
action on this will be taken accordingly.
(b) Grants-in-aid for upgradation of standards
of administration. - Government have accepted the Commission's
recommendations for making grants-in-aid to certain States
for upgradation of the standards of administration, equivalent
to the revenue and capital provisions which the Commission
has recommended, subject to the implementation and the monitoring
of the upgradation schemes in the manner indicated by the
Commission in Chapter 10 of its Report.
(c) Grants-in-aid to compensate States' loss
in excise revenue consequent upon introduction of prohibition.
_ Government of India had decided to compensate the States
in each of the years 1978-84, by way of grants-in-aid, to
the extent of one-half of the established loss of State excise
revenue on the introduction of prohibition treating the actual
excise revenue of 1977-78 as the base. The decision was communicated
to the States in August, 1978 and the Seventh Finance Commission
also was informed. The Commission, however, has held the view
that, where a State Government implements further measures
towards achieving total prohibition in the years from 1979-80
onwards, and thereby suffers a loss in the excise revenue
from potable liquor to a figure below that assumed by it for
the relevant year, the differences should be made up entirely
by the Central Government, by grants-in-aid under Article
275(1) of the Constitution, and has recommended accordingly.
The Government of India, however, consider it appropriate
that in the matter of introduction of total prohibition, which
is in pursuance of the Directive Principles of State Policy,
the losses in State excise revenue should be shared jointly
by the Government of India and the State Governments concerned.
The Government also consider that with the successful implementation
of measures towards achieving total prohibition, there is
scope for the State Governments to increase their other revenues.
Accordingly, Government have decided to adhere to its decision
to compensate the States to the extent of one-half of the
loss in revenues from State excise, and not accept the recommendation
of the Commission in this regard.
C-Alternative criteria of devolution
The Report of the Commission has appended
to it a Note of Dissent by one of the Members suggesting an
alternative formula for devolution of Central taxes and duties
as also statutory grants-in-aid to the States. Government
have carefully considered the Note of dissent together with
the observations of the majority thereon and have decided
that in regard to devolution of resources, which involves
a delicate issue of Centre-State financial relations, it would
be appropriate to accept the recommendations of the majority.
D-Recommendations on other terms
of reference
(i) Financing of relief expenditure. The
recommendations of the Commission relating to modifications
in the existing arrangements for financing of relief expenditure
by the States affected by natural calamities have been accepted
by the Government.
(ii) Debt relief. _ Government have accepted
the debt relief, estimated at Rs. 2155.80 crores, recommended
by the Commission for the States for the five years 1979-84,
but not the recommendations to convert the small savings loans
to the States into "loans in perpetuity". However,
in order not to disturb the order of the debt relief recommended
by the Commission for the five years 1979-84, the State Government
will not be required to make any repayment during 1979-84
on account of such loans as may be outstanding at the end
of 1978-79.
E-Implementation
The Commission's recommendations fall into
three categories, (i) those to be implemented by Order of
the President, (ii) those to be implemented by law of Parliament,
and (iii) those to be implemented by executive orders. The
recommendations under articles 270 and 275(1) of the Constitution
(relating to income tax and grants-in-aid respectively) fall
in the first category and the necessary Order will be submitted
to the President for approval. Recommendations relating to
distribution of Union duties of excise, Additional duties
of excise and Estate duty on property other than agricultural
land fall in the second category. Necessary legislation will
be promoted to implement them. The recommendations relating
to distribution of grants to States in lieu of the repealed
tax on Railway fares and grant on account of Wealth tax on
agricultural property and also changes in terms of repayment
of Central loans will be implemented by executive orders.
The Government while taking decisions on
the recommendations of the Seventh Finance Commission have
taken note of the inter-se distribution of resources resulting
from the Commission's recommendations. Having regard to the
fact that some of the States may not be as favourably placed
as others vis-à-vis their developmental requirements,
particularly in so far as the minimum needs programme is concerned,
Government have decided that modalities will be worked out,
in consultation with the Planning Commission, to see that
the States with relatively weak financial resource base are
enabled to implement adequately the revised minimum needs
programme, covering rural water supply, house sites for the
homeless, rural roads, rural electrification, rural health
care, bonded labour and elementary/adult education.
The Commission had made certain general suggestions
in the Report. These do not require any immediate decision
and will be considered in due course.
Sd/-
(H.M. Patel)
Minister of Finance
New Delhi
November 24, 1978.
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