The government's acquisition of land for projects has been facing protests across the country, the violence in Uttar Pradesh being only the latest. What is Land Acquisition? Land acquisition is the process by which the government forcibly acquires private property for public purpose without the consent of the land-owner. It is thus different from a land purchase, in which the sale is made by a willing seller. How is this process governed? Land Acquisition is governed by the Land Acquisition Act, 1894. The government has to follow a process of declaring the land to be acquired, notify the interested persons, and acquire the land after paying due compensation. Various state legislatures have also passed Acts that detail various aspects of the acquisition process. Land is a state subject. Why is Parliament passing a law? Though land is a state subject, "acquisition and requisitioning of property" is in the concurrent list. Both Parliament and state legislatures can make laws on this subject. Is there a new Act being proposed? The government had introduced a Bill to amend this Act in 2007. That Bill lapsed in 2009 at the time of the general elections. The government has stated its intent to re-introduce a similar Bill, but has not yet done so. What are the major changes being proposed? There are significant changes proposed in the 2007 Bill with regard to (a) the purpose for which land may be acquired; (b) the amount of compensation to be paid; (c) the process of acquisition; (d) use of the land acquired; and (e) dispute settlement mechanisms. We explain these briefly below. Purpose: Currently, land may be acquired for a range of uses such as village sites, town or rural planning, residential purposes for poor or displaced persons, planned development (education, housing, health, slum clearance), and for state corporations. Land may also be acquired for use by private companies for the above purposes or if the work "is likely to prove useful to the public". The 2007 Bill had a narrower list: (a) for strategic naval, military or air force purposes; (b) for public infrastructure projects; and (c) for any purpose useful to the general public if 70% of the land has been purchased from willing sellers through the free market. Compensation: The current Act requires market value to be paid for the land and any other property on it (buildings, trees, irrigation work etc) as well as expenses for compelling the person change place of residence or business. It explicitly prohibits taking into account the intended use of land while computing market value. The 2007 Bill requires payment of the highest of three items: the minimum value specified for stamp duty, the average of the top 50 per cent by price of land sale in the vicinity, and the average of the top 50 pc of the land purchased for the project from willing sellers. For computing recent land sale, the intended land use is to be used. Thus, agricultural land being acquired for an industrial project will be paid the price of industrial land. Process of acquisition: Several changes are proposed, including the requirement of a social impact assessment. Any project that displaces more than 400 families (200 in hilly, tribal and desert areas) will require an SIA before the acquisition is approved. Use of land acquired: The 2007 Bill requires the land acquired to be used for that purpose within five years. If this condition is not met, the land reverts to the government (it is not returned to the original land owners). If any acquired land is transferred to another entity, 80 pc of the capital gains has to be shared with the original land-owners and their legal heirs. Dispute Settlement: Currently, all disputes are resolved by civil courts, which results in delays. The 2007 Bill sets up Land Acquisition Compensation Dispute Resolution Authority at the state and national levels. These authorities will have the power of civil courts, and will adjudicate disputes related to compensation claims. Does the proposed Bill address the major issues? The Bill narrows the uses for which land may be acquired. It also changes the compensation due and links that to the market price for which land is to be used. There could be significant changes in acquisition for use by private industry. Firstly, they would have to purchase at least 70 pc of the required land from willing sellers (presumably, at fair market price). Second, the compensation amount for the remaining (upto 30 pc of land) could be significantly higher than the current method. This would be at a premium to the average paid to the willing sellers, and it would be based on intended industrial or commercial use which usually commands a higher price than agricultural land. However, the effect on acquisition for projects such as highways and railways will not be significant, as there is no benchmark for price determination for such use. This article appeared in Rediff News on May 12, 2011 and can be accessed here.
In November 2017, the 15th Finance Commission (Chair: Mr N. K. Singh) was constituted to give recommendations on the transfer of resources from the centre to states for the five year period between 2020-25. In recent times, there has been some discussion around the role and mandate of the Commission. In this context, we explain the role of the Finance Commission.
What is the Finance Commission?
The Finance Commission is a constitutional body formed every five years to give suggestions on centre-state financial relations. Each Finance Commission is required to make recommendations on: (i) sharing of central taxes with states, (ii) distribution of central grants to states, (iii) measures to improve the finances of states to supplement the resources of panchayats and municipalities, and (iv) any other matter referred to it.
Composition of transfers: The central taxes devolved to states are untied funds, and states can spend them according to their discretion. Over the years, tax devolved to states has constituted over 80% of the total central transfers to states (Figure 1). The centre also provides grants to states and local bodies which must be used for specified purposes. These grants have ranged between 12% to 19% of the total transfers.
Over the years the core mandate of the Commission has remained unchanged, though it has been given the additional responsibility of examining various issues. For instance, the 12th Finance Commission evaluated the fiscal position of states and offered relief to those that enacted their Fiscal Responsibility and Budget Management laws. The 13th and the 14th Finance Commissionassessed the impact of GST on the economy. The 13th Finance Commission also incentivised states to increase forest cover by providing additional grants.
15th Finance Commission: The 15th Finance Commission constituted in November 2017 will recommend central transfers to states. It has also been mandated to: (i) review the impact of the 14th Finance Commission recommendations on the fiscal position of the centre; (ii) review the debt level of the centre and states, and recommend a roadmap; (iii) study the impact of GST on the economy; and (iv) recommend performance-based incentives for states based on their efforts to control population, promote ease of doing business, and control expenditure on populist measures, among others.
Why is there a need for a Finance Commission?
The Indian federal system allows for the division of power and responsibilities between the centre and states. Correspondingly, the taxation powers are also broadly divided between the centre and states (Table 1). State legislatures may devolve some of their taxation powers to local bodies.
The centre collects majority of the tax revenue as it enjoys scale economies in the collection of certain taxes. States have the responsibility of delivering public goods in their areas due to their proximity to local issues and needs.
Sometimes, this leads to states incurring expenditures higher than the revenue generated by them. Further, due to vast regional disparities some states are unable to raise adequate resources as compared to others. To address these imbalances, the Finance Commission recommends the extent of central funds to be shared with states. Prior to 2000, only revenue income tax and union excise duty on certain goods was shared by the centre with states. A Constitution amendment in 2000 allowed for all central taxes to be shared with states.
Several other federal countries, such as Pakistan, Malaysia, and Australia have similar bodies which recommend the manner in which central funds will be shared with states.
Tax devolution to states
The 14th Finance Commission considerably increased the devolution of taxes from the centre to states from 32% to 42%. The Commission had recommended that tax devolution should be the primary source of transfer of funds to states. This would increase the flow of unconditional transfers and give states more flexibility in their spending.
The share in central taxes is distributed among states based on a formula. Previous Finance Commissions have considered various factors to determine the criteria such as the population and income needs of states, their area and infrastructure, etc. Further, the weightage assigned to each criterion has varied with each Finance Commission.
The criteria used by the 11th to 14thFinance Commissions are given in Table 2, along with the weight assigned to them. State level details of the criteria used by the 14th Finance Commission are given in Table 3.
Grants-in-Aid
Besides the taxes devolved to states, another source of transfers from the centre to states is grants-in-aid. As per the recommendations of the 14th Finance Commission, grants-in-aid constitute 12% of the central transfers to states. The 14th Finance Commission had recommended grants to states for three purposes: (i) disaster relief, (ii) local bodies, and (iii) revenue deficit.
