Syllabus: GS3/ Economy
Context
- Odisha has joined the growing demand for the Finance Commission to raise States’ share in India’s divisible tax pool to 50%, from about 41% currently.
What is Tax devolution?
- Tax devolution refers to the distribution of tax revenues between the central government and the state governments.
- The central government collects taxes (like income tax, GST, etc.) and a portion is shared with the states based on the Finance Commission’s recommendations.
- Objective: To promote fiscal federalism, strengthen the financial autonomy of state governments, and empower them to meet the needs of their respective populations.
- Formula Used: States’ share is decided by a formula meant to incentivize demographic performance and each state’s effort to mobilize its own tax revenue.
- The formula also takes into account geographic area, forest cover and the state’s per capita income.
- The Centre also aids States through additional grants for certain schemes that are jointly funded by the Centre and the States.
| Constitutional Provisions Related to Centre State Financial Relations – Articles 202 to 206 deal with the financial administration of states, including provisions related to their budget, expenditure, borrowing, and taxation powers. – Articles 268 to 272 outline the distribution of revenues between the Union and the states. – Article 280 provides for the establishment of a Finance Commission every five years (or as specified by the President). – Article 282 allows the Union government to provide financial assistance to states for any public purpose. |
Current Share of the States
- Recommendations of the 14th FC: It hiked the tax devolution to states to 42% from 32%, and also added a new provision of revenue deficit grants to states facing any resource gap.
- The 15th finance commission, under the chairmanship of N K Singh has revised tax devolution and brought it down to 41% from 42%.
- So the current tax devolution to states stands at 41% till 2026.
- The 90:10 rule is still applicable to the northeastern and hill states, although there is no special status category.
- All the other states receive Central funding in a 60:40 ratio, 60% being the Central government’s contribution and 40% states.
Concerns of the States
- Demand for more funds: States argue they should receive more funds than recommended by the Finance Commission.
- States argue that they have greater responsibilities, including education, healthcare, and policing services.
- Disparities Among States: Developed States like Karnataka and Tamil Nadu feel they receive less money from the Centre than they contribute in taxes.
- It is argued that more developed States with better governance are being penalized by the Centre to help States with poor governance.
- Divisible Pool Concerns: Cesses and surcharges, which are not shared with the States, can constitute up to 28% of the Centre’s tax revenues, leading to revenue losses for States.
Way Ahead
- The 16th Finance Commission should review the States’ demand for a higher tax devolution based on fiscal needs and expenditure responsibilities.
- Strengthening Disaster Resilience Funding: A separate central disaster relief fund could be established for disaster-prone States to ease their financial burden.
- Capacity Building: Strengthening the financial management and capacity of states to better utilize devolved funds for development.
Source: TH
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