NEW DELHI, May 7: The finance ministry has bowed to pressure from the state governments to implement the Tenth Finance Commission's `alternative scheme of devolution' for five years. The commission had recommended that the scheme should have a tenure of 15 years.

While agreeing to a five-year tenure, the ministry has proposed that 28 per cent of the pooled taxes should be automatically assigned to the states. The allocation of one per cent of the pooled amount should be pegged to fiscal performance of the states concerned.

The commission's report had no such caveat. It said that all taxes, including corporation tax and customs collections, should be pooled and 29 per cent of the amount be passed on to the states. The arrangement was linked to termination of tax rental arrangements.

The ministry is now evolving a set of quantitative criteria, involving parameters like debt-servicing and fiscal deficit, to determine the allocation of the last one per cent of the pooled amount. "It will essentially be an incentive scheme. States which foster prudent management will get more," a finance ministry official claimed.

The states, on the other hand, are not willing to stick to a rigid tax-sharing regime over a 15-year period. Though the system of pooling all taxes seeks to allow the states to partake of the enhanced buoyancy of different taxes as a result of tax reforms, they are, apparently, of the view that a better deal may be forthcoming from the Eleventh Finance Commission, scheduled to be set up next month.

The ministry has decided to stick to the 29 per cent devolution limit, despite suggestions from state chief ministers that the ceiling be raised and pegged between 35 and 40 per cent. Under the present tax-sharing system, the centre devolves 47.5 per cent of net collection of excise duties and 77.5 per cent of the net proceeds of income tax to states.

On an average, the distribution works out to 26 per cent of the centre's total tax receipts. That apart, the states have tax rental arrangement with the centre in the case of additional excise duties in lieu of sales tax.

This has been in the range of three per cent of the total receipts. Thus, the 29 per cent, which the finance ministry has accepted for devolution, cannot exactly be construed as a hike in total devolution to the states.

According to the finance ministry, the proposal to link allocation of a percentage of the funds in the tax pool to fiscal prudence has evoked a positive response from a few state governments. But opposition to the move cannot be entirely ruled out as it will entail taking self-disciplinary steps.

The ministry, however, argues that the centre's grant-in-aid window on the non-plan account will continue to be available for disadvantaged states to correct their rogue fiscal deficits. States have a habit of running up huge deficit on the non-plan revenue side. Almost invariably, they look towards the finance ministry to help bridge the gap.

Under the circumstances, it is argued that impetus-linked devolution from the collective pool should not pose a major threat to the fiscal independence of states.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.