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Will have to take a “nuanced approach towards tax devolution”: Advisory Council of the Finance Commission

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A key advisory body of the finance commission has said that the constitutional body will have to take a “nuanced approach towards tax devolution” to the States and other transfers in midst of an unprecedented situation triggered by COVID-19 outbreak.

The finance commission will consider the body’s suggestion on redrawing the fiscal consolidation roadmap including providing a range and a median target level on the lines of the monetary policy framework, its chairman N K Singh said.

“The Advisory Council felt that Finance Commission is faced with an unprecedented situation of uncertainties and will have to take a nuanced approach towards tax devolution to the States, other transfers, financing of expenditures in the midst of revenue strains including through borrowings and the path of fiscal consolidation,” a statement from the commission said after the meeting of the Economic Advisory Council.

However, Singh said devolution cannot be altered for each year. The Finance Commission has already given an interim report for FY21, which Singh would be treated as a zero year for which recommendations will not be given. The final report will prescribe award for the next five financial years.

The Economic Advisory Council also cautioned that the general government debt relative to GDP is likely to increase steeply in the initial years of the Commission award, but the endeavour should be to bring it down in the subsequent years.

Singh said some of the council members suggested that the debt to GDP target needs to be revisited as it may be way upwards of what it has historically been.

On the issue of fiscal consolidation roadmap, Singh said there was merit in looking at a range than a number. “We will consider (Council’s suggestions),” Singh said, adding that in case the Commission does decide it will give a mean- like monetary policy committee.

The Council members, the statement said, also felt that the Commission will have to think unconventionally, especially in treating the five years at hand from 2021-22 to 2025-26 and advised that the base year 2020-21 and the first year of 2021-22 may need to be viewed differently from the remaining four years when the revenue situation is likely to improve gradually.

Singh said the chief economic advisor K V Subramanian, who gave a presentation to Council on his assessment of the economy, said the government was closely watching 16 high frequency indicators and there was a rebound in some sectors.

The FC will submit its report in October, which is the appointed date by the President, he said.

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