With the Finance Ministry coming down heavily on the Fifteenth Financial Commission on the latter’s suggestion for creating a ‘Defense Modernization Fund’, the question pesters the general public at large as to whether a separate defense cess is really required. Seemingly, the capital needs of the Indian military do not seem to be a problematic scheme. It rather appears to envisage a separately structured funding program in furtherance of enabling the Indian military to work in a more well-ordered manner.
WHY THE FUSS?
The root of every operative that there is, is guided by the procedure laid under the Indian Constitution. Hence, a casual read of the Seventh Schedule of the Constitution elucidates the responsibilities between the Union and the States. Subjects such as defense, and foreign affairs are on the Union list while responsibilities like public order, healthcare, etc. fall under the purview of the State List. The third list, i.e., the Concurrent List is a unique, centralizing feature adopted from the British Raj, that embodies the fundamentals of federalism. The list has both State and Union play a role with powers tilting towards the latter. It was due to this provision only that the government brought in the farm laws. However, while a large section of funds and resources rests with the Union in New Delhi, expenditure of those funds is at the behest of different States, the taxes of which is collected by New Delhi. Hence, the Financial Commission of today now distributes the revenue collected by the Centre to various States and therefore, supervises the financial commitments of the States and the Union.
Now, the problem with the creation of a special fund – in this case for ‘defense’- creates a special third category along with Union and State. Theoretically, the Finance Commission therefore will inadvertently split monies between Union, State, and the Defense Fund. It is interesting to note that the defense is a subject already under the Union List and therefore, the creation of a third category would only cause stress for States to give up funds for defense. Now much like the game of dominoes, if one separate fund is created, many other demands for the creation of special pockets for every governance function would surface, which would unnecessarily create disruption of the flow of funds to the subjects in either of the lists and therefore would go far beyond the provisions prescribed under the Seventh Schedule in the Constitution. Hence the downpour of the Financial Ministry on the 15th Financial Commission for the reasons that setting up a separate fund for a function that is already covered under the Union’s List is against good parliamentary practice is perfectly valid.
TECHNICAL OVERSTEPPING
While the Finance Ministry may have rebuffed the request to create a different fund for Defense, it is however significant to understand how such a report was allowed to be tabled before the ministry in the first place. NK Singh, the chairman of the 15th Finance Commission, when posed with similar questions, contended that as per the legal opinion he received, the defense was a “shared responsibility of the Union and the states”. Defense is explicitly mentioned as the subject under Union List and the closest thing that resembles an iota of Defense is ‘Public Order’ which falls under the State List. In no way whatsoever, can anyone with the caliber and prudence as that of NK Singh can conclude that Defense is a shared subject. Furthermore, he also remarked that Finance Commission transcends the classification in the Seventh Schedule of the Constitution, which is simply an inexplicable argument. Finance Commission is in no way empowered to transcend any part of the Indian Constitution, especially something as critical as the Seventh Schedule.
Another interesting aspect here is the branding of the ‘defense’ fund as cess. Tax and Cess are two different contributions to State welfare. While Tax is already existing in the form of GST and Income Tax, a cess is imposed as an additional tax besides the existing tax (Tax on Tax). Now while the former is kept in the Consolidated Fund of India CFI for the government to use it for any purposes it deems fit, the latter, though also kept in the CFI, can be used by the government after due appropriation from Parliament for ‘specified purpose’. Now, what rebranding of ‘general tax’ as ‘cess’ does is that it brings any revenue generated through cess under the ambit of ‘specified purpose’ resulting in states sharing any of that revenue. Statistically, cesses and surcharges that were around 10% in 2010-11 are almost doubled in the year 2021 figuring around 19.9%. This increase in cesses and surcharges is shrinking the divisive pool between State and Union, leaving States bleeding out to dry. Therefore, to have a defense cess under the ‘specified purpose’ funds would only hurt the States of the Country as the gap between State and Union’s resources would further increase.
THE NEED OR THE WANT OF NEED?
The Union in 2019, empowered the Finance Commission with additional Terms of Reference to enable it to make a suggestion on how to create the fund. Defense Ministry further stressed on the need to increase focus on national security and warranted states to share the financial burden of maintaining and upgrading the security apparatus, including buying weapons from global suppliers, etc. Defense Ministry urged that subjects like Terrorism, insurgency, and securing national borders should be recognized as a shared responsibility for the Union and States, rather than leaving it just for the Union to take care of. The demand though extremely urgent goes beyond the nexus of the Constitution. Furthermore, the 10th Finance Commission also laid down the principle that cess and surcharge should be temporary and rare.
Union has always been seen complaining about limited resources and funds and yet does not shy away from spending money on subjects concerning the State List. Cribbing about not having enough money to fund its core function of defense and catering to the electoral compulsions by spending money on state subjects – Union has only made things difficult for itself and confusing for the public at large. A demand from the Home Ministry for a seed corpus of Rs. 50,000 crores to be carved out of dues from States for Central Armed Forces deployment is simply a result of the Union being derelict in its responsibilities. The constitutional remit of defense is often sidelined during elections and therefore, it is natural for the union to have a dry state of funds to cater to its core duty. It is therefore the job of the Finance Commission to stop the political drivers in their path and prevent populist rhetoric from influencing devolution. Instead, the Commission seems to be a puppet of the Union, to say the least.