15th State Finance Commission

The 15th State Finance Commission (SFC) is a constitutionally mandated body that, between 2020 and 2025, advises the Union and state governments on the distribution of fiscal resources. Chaired by former Union Finance Minister N. K. Singh, the commission’s hallmark was a substantial rise in the states’ share of central tax proceeds—from 32 % under the 14th SFC to 41 %—and a renewed framework for Goods and Services Tax (GST) compensation, reshaping inter‑governmental finance in India.

Constitutional Basis and Origins

Article 280 of the Indian Constitution obliges the President to constitute a State Finance Commission every five years. The 15th SFC was formally established on 30 June 2020 under the Finance Commission Act 1951, succeeding the 14th SFC (2015‑20). Its formation responded to fiscal pressures arising from the GST rollout, the COVID‑19 pandemic, and growing disparities among states. The commission’s terms of reference, outlined in the presidential order, required it to (a) recommend the share of central taxes to be devolved, (b) suggest criteria for allocation, and (c) propose measures for fiscal consolidation and capacity building.

Composition and Mandate

The commission comprised a chairperson, two members, and a member-secretary. In addition to N. K. Singh (chair), the members were Dr S. Mahendra Dev, a former chief secretary of Madhya Pradesh, and Dr M. R. Kumar, an economist with the Ministry of Finance. The member‑secretary was the Secretary‑General of the SFC, a senior civil servant from the Department of Economic Affairs. Their collective mandate extended to recommending grants for health, education, and disaster management, as well as suggesting a GST compensation cess to bridge the revenue gap for states.

Methodology and Key Provisions

The 15th SFC adopted a multi‑factor formula to allocate the increased tax share. Weightage was assigned as follows: population 30 %, area 15 %, forest cover 10 %, fiscal discipline 10 %, revenue‑raising capacity 15 %, and inverse per‑capita income 20 %. This blend aimed to balance demographic pressure with fiscal prudence and environmental considerations.

A cornerstone of the report was the GST compensation mechanism. The commission recommended a 2 % cess on luxury and sin goods (e.g., cigarettes, liquor, high‑end automobiles) and a 0.5 % cess on petroleum products, to be collected for five years. The projected compensation pool amounted to roughly ₹2.5 lakh crore (≈ US$30 billion), to be distributed on a per‑capita basis, ensuring that states could meet expenditure commitments despite the transition to GST.

Recommendations and Fiscal Impact (2020‑25)

The commission’s principal recommendation was that 41 % of the net proceeds of central taxes—comprising income tax, corporate tax, and customs duties—be transferred to states, a jump of nine percentage points from the previous cycle. This uplift translated into an additional ₹1.5 lakh crore (≈ US$18 billion) of resources for states over the five‑year horizon.

Beyond the tax share, the SFC earmarked approximately ₹1.5 lakh crore for sector‑specific grants, with ₹70 000 crore directed to health and education, ₹30 000 crore for rural infrastructure, and ₹20 000 crore for disaster mitigation. It also introduced a “Fiscal Consolidation Fund” of ₹10 000 crore to reward states that achieve a fiscal deficit below 3 % of Gross State Domestic Product (GSDP) for three consecutive years.

Implementation and Ongoing Issues

The Union Finance Ministry incorporated the commission’s recommendations into the Finance Act 2020 and subsequent budget statements. While the increased devolution has bolstered state finances, implementation challenges persist. States have raised concerns about the timing of GST compensation transfers, citing cash‑flow mismatches during the pandemic. Moreover, the cess‑based funding model faces political resistance, particularly from central ministries wary of expanding indirect taxes.

Monitoring mechanisms, such as the annual “Fiscal Performance Report” submitted by each state, were strengthened to assess compliance with the fiscal discipline criteria. Early assessments (2021‑22) indicate that several high‑growth states, like Karnataka and Gujarat, have leveraged the additional resources to expand health infrastructure, whereas lagging states continue to grapple with revenue‑raising capacity constraints. The 15th SFC thus represents a pivotal, though imperfect, step toward a more balanced fiscal federalism in India.