On financial devolution among States

Syllabus: GS-II

Subject: Polity

Topic: Federalism ,

Issue: Financial relation

Southern state have raised issue of not receiving proper share in financial devolution:

  • Divisible pool of taxes are defined in article 270 of constitution divided as per recommendation of Finance Commission(Article 280)


Key issues

  • Around 23% of Union government’s gross tax receipts are collected through Cess and surcharge, not shared with states.
  • Variations exist in the amount each state receives back for every rupee contributed to central taxes. (Due to headquarter of corporations in few State capitals.)
  • Higher weightage for equity and needs over efficiency.
  • Grants-in-aid recommended by FCs vary among states, is based on population and area.

The way ahead:

  • Enlarge the divisible pool by including a portion of Cess and surcharge, while gradually discontinuing various impositions to rationalize tax slabs.
  • Increase weightage for efficiency criteria in horizontal devolution,
  • Considering relative GST contributions from states.
  • a more formal arrangement for states’ participation in the constitution and working of the Finance Commission, akin to the GST council.
  • States should devolve adequate resources to local bodies for vibrant and accountable development, furthering the balance between equity and federalism.
Prelims connect( meaning of different term used in Finance Commission formula)

·         Income distance’ is the distance of a State’s income from the State with highest per capita income which is Haryana.

·          ‘Population’ is the population as per the 2011 Census.(from 15th FC)

·         ‘Forest and ecology’ consider the share of dense forest of each State in the aggregate dense forest of all the States.

·         ‘The demographic performance’ criterion has been introduced to reward efforts made by States in controlling their population.

·         ‘Tax effort’ as a criterion has been used to reward States with higher tax collection efficiency.

Scroll to Top