Devolution of power was introduced to Sri Lanka by the 13th Amendment to the Constitution establishing Provincial Councils with the powers granted under the Devolved list (Ninth Schedule List II) and the National Government with the powers granted under the Restricted list (Ninth Schedule List I) and further introducing a Concurrent list (Ninth Schedule List III) that has to be shared by the National and Provincial administrations.
Same amendment to the constitution has established the Finance Commission under 154 R as follows.
154 R 01:
There shall be a Finance Commission consisting of -
(a) the Governor of the Central Bank of Sri Lanka;
(b) the Secretary to the Treasury; and
(c) three other members to represent the three major communities each of whom shall be a person who has distinguished himself, or held high office, in the field of finance, law, administration, business or learning.
(Accordingly the current Commission Members are (Udithe H Palihakara – Chairman, Indrajit Coomaraswamy – Ex-officio member and the Governor of the Central Bank of Sri Lanka. R H S Samaratunga – Ex-officio member and the Secretary to the Treasury, V Kanagasabapathy – Member, H M Zafrullah – Member)
154 R 03:
The Government shall, on the recommendation of and in consultation with, the Commission, allocate from the Annual Budget, such funds as are adequate for the purpose of meeting the needs of the Provinces.
154 R 04:
It shall be the duty of the Commission to make recommendations to the President as to -
(a) the principles on which such funds are granted annually by the Government for the use of Provinces, should be apportioned between various Provinces; and,
(b) any other matter referred to the Commission by the President relating to Provincial finance
154 R 07:
The President shall cause every recommendation made by the Finance Commission under this Article to be laid before the Parliament, and shall notify Parliament as to the action taken thereon.
Though the 19th Amendment to the Constitution has included the Finance Commission in the independent commission list (Section 41B (6) still the mandate of the Finance Commission is derived from the 13th Amendment.
Accordingly, Recommendations of the Finance Commission for 2018 was submitted to the President and the President has laid the recommendation before the Parliament, after obtaining approval of the Cabinet of Ministers.
The Recommendation for 2018 consists of the following Chapters.
1. Introduction
2. Mandate of the Finance Commission
3. Government Grants to the Provinces
4. Assessment of Provincial Needs
4.1 Assessment of Capital Needs
4.2 Assessment of Recurrent Needs
4.3 Capital and Recurrent Needs submitted by the Provinces for 2018
4.4 Apportionment of Provincial Capital Funds
4.5 Apportionment of Provincial Recurrent Funds.
5. Provincial Revenue
5.1 Transfer of Government Revenue
5.2 Revenue Collected from Devolved Sources
5.3 Revenue Forecast for 2018
5.3.1 Transfer of Government Revenue
5.3.2 Targets for Devolved Revenue Sources - 2018
6. Policy Recommendations
The full report of the recommendation is available in the Finance Commission web site fincom.gov.lk
The recommended policies coming under chapter 6 are as follows:
l To achieve Balanced Regional Development in the country, funds distribution among the provinces based on a rational methodology will not be effective if a meagre proportion of the National Budget is only spent through provincial councils. Therefore, it is recommended that the National Ministries should consider the proportions recommended by the Finance Commission in distributing their allocations among the provinces.
l It is recommended that funds disbursed for the development sectors coming under the devolved subjects should be channeled through the provincial councils. It is further recommended that in the event of implementation of projects identified under devolved subjects by the Line Ministries should also be carried out through the Provincial Councils. This would minimize duplications of funds and overlapping of activities, thereby promoting effective utilization of funds and maintaining transparency and accountability of investments.
l In the policy making process for balanced regional development, lack of data and information related to public fund allocation and investment among regions are observed, due to poor inter-governmental fiscal relations and lack of coordination. Absence of common framework in the national planning system is also identified as a main issue that affects effective decision making process. Therefore, the establishment of a common framework for national and sub-national planning system without undermining the concept of devolution is recommended. Further, this can be supported by a national level Management Information System (MIS) coordinated by the Department of Project Monitoring and Management which caters for national and sub-national level information requirements for planning and monitoring.
l Provincial Councils play a major role in regional development in line with national policies and priorities, with the available resources at provincial level as well as funds channeled through the national ministries. Hence, it is observed that the recurrent expenditure of Provincial Councils cover the cost of human resource component of the development activities not only for the Provincial Councils but also for the National Ministries. Accordingly, it is recommended that high priority should be given for the enhancement of human resources in the Provincial Councils. This will enhance the identification of real needs, planning, implementation, and monitoring, evaluating and effective management of development programmes.
l Currently, only business entities with quarterly income exceeding Rs 3mn. are subject to NBT, which is collected at the National Level, while businesses having less than Rs. 3mn. quarterly income are exempt from NBT. Hence, it is recommended that Provincial Councils should be allowed to collect taxes from business entities with quarterly income up to Rs 3mn. Further, it is recommended to enhance provincial revenue through untapped revenue sources such as private schools/tutories/local and foreign collages of higher education, health service providers, and professional service providers.
l It is recommended that 25%-50% of the beneficiary contribution to be made compulsory for any direct grant provided under national and provincial development programmes to ensure commitment of the beneficiary and sustainability of such investments.
l It is recommended that there should be regularization and proper monitoring of private schools and private institutions of higher education in order to ensure quality education.
l It is recommended that the state education should guide students for enhancing skills development.
l It is recommended to introduce an attractive provincial incentive package for private investors who are willing to invest in rural lagging/backward regions. The proposed preferential incentive package should be characterized by interest subsidies, tax holidays, reduced tax rates, concessionary loan schemes and easy collaterals. This will also be helpful to focus public investments on social infrastructure projects which are needed for uplifting the day-to-day life of ordinary people.
l It is recommended to link infrastructure facilities with anchor projects with the provincial growth centres based on industrial activities. Considering the urgent need of linking the provincial growth centres with national level mega projects, special budgetary allocations are suggested to be provided for improving infrastructure by way of facilitating private investments at regional level.
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