As the 16th Finance Commission gears up its assessment of public finance, the Comptroller and Auditor General of India (CAG) on Wednesday flagged key areas of concern, including a decline in the states’ own tax revenue (SOTR) buoyancy, varying levels of SOTR and non-tax revenue, underscoring the need for more robust revenue collection mechanisms.
The CAG also drew attention to the need for regular reporting of the off budget borrowings, meeting the FRBM (the Fiscal Responsibility and Budget Management Act, 2003) targets and taking into account post audit liabilities computed by the CAG in its reports.
The CAG in a presentation to the Commission, shared various audit findings for the Union and states in various sectors, the fiscal challenges and stress points, including the gap between expenditure and non-debt receipts for the union and states combined, the supreme auditor said in a statement.
These could be a crucial source of information for the Commission while examining the extent of fiscal consolidation for the union and the states. The Commission will make its recommendations available by October 31, 2025, on the central tax devolution formula and grants-in-aid to states for five years commencing April 1, 2026.
The union, the states, local bodies and the public sector enterprises (PSEs) are under the audit of the CAG. In addition, the CAG also maintains the accounts of the states.
The CAG’s presentation drew attention to untapped revenue sources. Notably, areas such as stamp duty, registration fees, and state excise collections have been identified as having substantial potential for enhanced fiscal performance. Recommendations in this regard include regular updates to market value guidelines, improved classification of property types, and the adoption of modern technology—such as sensor-based systems and QR codes—to minimize revenue leakages and improve data accuracy.
In the Goods and Services Tax (GST) administration, the CAG has also proposed several reforms aimed at widening the tax base and enhancing transparency. It suggested the integration of unregistered goods and service providers into the GST framework via automated data collection and real-time information systems, along with improvised taxpayer verification processes. These initiatives are expected to not only streamline the tax collection process but also to ensure more accurate apportionment of inter-state tax flows.
The CAG gave a strong emphasis on the need to standardize accounting practices at all tiers of the government for transparent and ready availability of comparable fiscal information. The presentation called for the harmonization of the heads of expenditure and adoption of a uniform 6-tier classification system by state governments without deviations.
It was also highlighted that, as an immediate measure, harmonisation of local bodies accounts with central and state accounts may be attempted in the top 100 cities. Such steps would facilitate the seamless consolidation of fiscal data and strengthen transparency in public financial management, thereby empowering policymakers with clearer insights into both revenue and expenditure.
As a good practice, the CAG suggested establishment of a Budget Stabilization Fund by jurisdictions with surplus revenues. This fund, designed to cushion against unexpected budgetary shortfalls or cyclical disruptions using proceeds derived from specific revenue streams such as mineral resources, is presented as a replicable model for other regions with similar fiscal profiles. Adoption of this measure could significantly enhance financial resilience and contribute to more stable fiscal management across jurisdictions.
A key component of the meeting is centered on the financial management of local bodies. The CAG shared insights from performance audits across numerous urban local bodies and Panchayati Raj Institutions, pointing out issues such as incomplete devolution of functions, heavy dependence on Central and State grants, and low levels of own-source revenue.
In this regard, recommendations included integrating local body use of Integrated Financial Management System (IFMS) for onboarding the payment / fund transfer made by the States to the ULBs and the RLBs and streamlining accounting practices to ensure consistent and transparent financial reporting at the grassroots level. Need for development of specifically suited system for the processing of the transactions of the ULBs/RLBs and their accounts was suggested, which can be incentivized by the Finance Commission.
Additionally, the presentation addressed the lack of oversight of state public sector enterprises in submission of their annual accounts, urging corrective measures to address persistent losses and inefficiencies, and recommending a close monitoring of disinvestment strategies.
Source from: https://www.financialexpress.com/money/cag-flags-decline-in-states-tax-buoyancy-3768608/