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New Defence Fund may Reduce Divisible Central Tax Pool

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The Fifteenth Finance Commission (15th FC) headed by NK Singh is expected to create a defence and internal security fund likely to be called Rashtriya Suraksha Nidhi (RSN) by setting aside money from gross tax revenues of the central government. The Cabinet cleared enabling approvals on July 17, increasing focus on national security while also indicating it wants states to share the financial burden of maintaining and upgrading its security apparatus, including buying weapons from global suppliers, ET’s conversations with highly placed sources and review of confidential documents reveal. Although the original terms of reference (ToR) of the 15th FC did ask it to look into the demand on central resources for defence and national security, they had not specifically mandated FC to suggest creation of a fund outside the Consolidated Fund of India. The Cabinet decision to amend ToR came after prolonged discussions between the government and the commission and splitting hairs over its mandate and legal powers failed to clear the way for an exclusive corpus. A top official of the 15th FC had told ET before the Cabinet approval that the commission did not have the mandate to create the fund. “We can only recommend a formula for sharing central tax revenues between the Union and states. The Centre can decide whatever it wants to do with its share. Our job is to find a balance,” he had told ET on condition of anonymity.

Replying to ET’s queries after the Cabinet decision, a commission spokesperson said: “In view of the fact that the commission is yet to receive revised ToR from the President, it is not able to respond at this moment of time.’’ After year-long deliberations, the 15th FC came up with four options. One was to allocate funds to the Centre through a cess or a surcharge. However, it would have been steep as defence and security expenditure is high. Also, the 10th FC had laid down the principle that cess and surcharge should be temporary and rare.The second option was to increase weightage of defence and national security while working out the devolution formula. That would have likely shrunk states’ share from the 14th FC’s award of 42%. The third way was to earmark a portion of the Centre’s share for defence, which would have helped create a fund but made no difference to the total money available to the Centre. The last and preferred option was to sequester a portion of gross tax revenues for defence and internal security by creating a Rashtriya Suraksha Nidhi before computing the divisible pool. That means the total money available for sharing would be less. It was a controversial but most viable option. The FC then sought expert opinion from senior lawyer K Parasharan. The legal expert said in the context of cooperative federalism, any allocation for defence and internal security under Article 280 (the FC’s Constitutional foundation) “may result in criticism by the states that their share of allocation has been reduced from the previous years”. He went on to say that states’ share from the divisible pool was not a benefaction of the Union or FC. “It is an entitlement of states whose contours are to be determined fairly by the FC on the basis of a clear and rational formula.”

The way out, Parasharan offered, was the commission could be empowered if the President made a supplementary reference enabling the 15th FC to consider how defence and internal security should be funded while devising its vertical devolution formula. The legal opinion which ET has reviewed clearly said that without the amendment, the 15th FC could only make a suggestion and the government would have to go to Parliament to introduce a defence-specific levy. In a presentation to the FC, the defence ministry had argued for defence and national security being included “in our understanding of sustainable development.” It said issues such as terrorism, insurgency and securing borders should be recognised as shared responsibility of the Union and states, without which the national development framework would be incomplete.
 Discussions between the defence ministry and FC began in early 2018 after the finance ministry, in December 2017, rejected the demand for a non-lapsable fund recommended by Parliament’s Standing Committee on Defence headed by BC Khanduri. “Moving general revenues out of Consolidated Fund of India and parking in corpus fund is against the spirit of Article 266(1) (which governs CFI) of the Constitution,’’ the finance ministry argued. It feared that allowing one could raise competing demand from other ministries.

The Economic Times, 26th July 2019

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