The Twelfth Finance Commission (TFC) was appointed on November 1, 2002 to make recommendations regarding the distribution between the Union and the States of net proceeds of shareable taxes, the principles which should govern the grants-in-aid of the revenues of States from the Consolidated Fund of India and the measures needed to augment the Consolidated Fund of a State to supplement the resources of local bodies in the State on the basis of the recommendations made by the Finance Commission of the State.
The terms of reference mandated the Commission to review the state of the finances of the Union and the States and suggest a Plan by which the Governments, collectively and severally, restore budgetary balance, achieve macroeconomic stability and debt reduction along with equitable growth. Furthermore, the Commission was also asked to suggest corrective measures for debt sustainability and to review the Fiscal Reform Facility introduced by the Central Government. The Commission submitted its report on November 30, 2004 covering the period 2005-10.
The recommendations of the Commission include a plan for restructuring of public finances of the Centre and the States through improvement in revenue mobilization and bringing down debt levels, and through enactment of fiscal responsibility legislation by States .The Commission recommended debt relief to States linked to fiscal reforms, doing away with the present system of Central assistance to State plans in the form of grants and loans and transfer of external assistance to States on the same terms and conditions as attached to such assistance by external funding agencies.
The TFC raised the share of States in shareable Central taxes from 29.5 per cent to 30.5 per cent. Total transfers to States recommended by the TFC amount to Rs.7, 55,752 crore over the five year period 2005-10. Of this, transfers by way of share in Central taxes and grants-in-aid amount to Rs.6, 13,112 crore and Rs. 1, 42,640 crore, respectively.
The total transfers recommended by the TFC are higher by 73.8 per cent over those recommended by the Eleventh Finance Commission (EFC). Within the total transfers, while the share in
Central taxes is higher by 62.9 per cent, grants-in-aid recommended by the TFC are higher by 143.5 per cent over those recommended by the EFC.