{"id":20837,"date":"2024-01-23T18:46:47","date_gmt":"2024-01-23T13:16:47","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=20837"},"modified":"2024-01-23T21:29:48","modified_gmt":"2024-01-23T15:59:48","slug":"ebate-over-revenue-sharing-formula","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/editorial-analysis\/23-01-2024\/ebate-over-revenue-sharing-formula","title":{"rendered":"Debate over Revenue Sharing Formula\u00a0"},"content":{"rendered":"\n<p><strong>Syllabus: GS 2\/Polity and Governance&nbsp;<\/strong><\/p>\n\n\n\n<p><strong><span style=\"text-decoration: underline;\">In Context<\/span><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Recommendations of the Finance Commissions have&nbsp; created friction between States and the Centre.<\/li>\n<\/ul>\n\n\n\n<p><strong><span style=\"text-decoration: underline;\">About Finance Commission\u00a0<\/span><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>It is a constitutional body formed by the <strong>President of India <\/strong>to give suggestions on centre-state financial relations.<\/li>\n\n\n\n<li><strong>Article 280(1) of the Constitutions <\/strong>lays down that the modalities for setting up of a Finance Commission\n<ul class=\"wp-block-list\">\n<li>Currently, 41 percent of taxes collected by the Centre is devolved in 14 instalments among states during a fiscal year.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>The <strong>Fifteenth Finance Commission<\/strong> was constituted in <strong>2017<\/strong>.\n<ul class=\"wp-block-list\">\n<li>The recommendations of the Fifteenth Finance Commission are valid upto the financial year 2025-26.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<p><strong><span style=\"text-decoration: underline;\">Roles and responsibilities<\/span><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The important tasks of the Finance Commissions are (i)\n<ul class=\"wp-block-list\">\n<li>To<strong> recommend the proportion of the Union tax revenues <\/strong>to be assigned to States and<\/li>\n\n\n\n<li>To recommend the share of each State in the assigned tax revenue.&nbsp;<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<p><strong><span style=\"text-decoration: underline;\">Distribution formula\u00a0<\/span><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>It devises a distribution formula to arrive at a share for each State, and it is based on the principles of <strong>equity and efficiency.&nbsp;<\/strong>\n<ul class=\"wp-block-list\">\n<li>Equity stipulates that the revenue-scarce States and States with higher expenditures get larger shares of Union tax revenue than others.&nbsp;<\/li>\n\n\n\n<li>Efficiency is to reward the States that are efficient in collecting revenue and rationalising spending.&nbsp;<\/li>\n\n\n\n<li>The trade-off between equity and efficiency is normative and remains dynamic in successive Finance Commission recommendations.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<p><strong><span style=\"text-decoration: underline;\">Methodology of 15th finance Commission<\/span><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Successive Finance Commissions have assigned <strong>10% to 20% weight t<\/strong>o income tax revenue collection\/assessment in the distribution formula for income tax revenue because collection is not a good indicator of contribution.<\/li>\n\n\n\n<li>In the 15th Finance Commission, the distribution formula had a tax effort with a weight of<strong> 2.5%,<\/strong> and demographic performance, an indicator of efficiency in population control, was given a weight of<strong> 12.5%.<\/strong>\n<ul class=\"wp-block-list\">\n<li>&nbsp;The remaining<strong> 85% weight<\/strong> was distributed among equity indicators of per capita income, population as per the 2011 Census instead of the conventional 1971 Census, area, forest cover, etc.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>It&nbsp; introduced the fertility rate in the formula to reward States which had reduced the fertility levels.<\/li>\n<\/ul>\n\n\n\n<p><strong><span style=\"text-decoration: underline;\">Concerns of various states\u00a0<\/span><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Revenue sharing among states is a controversial subject given that there is always a fund crunch and the welfare needs vary.&nbsp;<\/li>\n\n\n\n<li>This leads to complaints from some states, especially those in southern India, that they get a smaller share, especially considering their contribution to taxes.\n<ul class=\"wp-block-list\">\n<li>Some States have been arguing that their contributions to the Union tax revenue have been higher than others and, therefore, they <strong>rightfully have higher shares i<\/strong>n the Union tax revenue.&nbsp;<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Tax contribution is an efficiency indicator<\/strong> because a State\u2019s level of development and economic structure decides its tax contribution.\n<ul class=\"wp-block-list\">\n<li>However, Finance Commissions had assigned o<strong>nly 10% to 20%<\/strong> weight to this efficiency indicator.&nbsp;<\/li>\n\n\n\n<li>The Finance Commissions have always favoured assigning more than<strong> 75% weight to equity indicators.<\/strong><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<p><strong><span style=\"text-decoration: underline;\">Suggestions\u00a0<\/span><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Some states feel&nbsp; \u2018cheated\u2019 because of the overuse of the <strong>equity criterion.<\/strong>&nbsp;<\/li>\n\n\n\n<li>Therefore an appropriate balancing of criteria is needed<strong> particularly in the context of the rise in unconditional transfers.<\/strong><\/li>\n\n\n\n<li><strong>Tax contribution<\/strong> by each State is a <strong>good measure of efficiency<\/strong>, and the <strong>Goods and Services Tax (GST) regime creates <\/strong>an opportunity for its inclusion in the distribution formula.\n<ul class=\"wp-block-list\">\n<li>In addition to GST, <strong>petroleum <\/strong>consumption is also an indicator of tax contribution to the national exchequer.&nbsp;<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>But Due attention needs to be paid to the needs of the lower income States<strong>.<\/strong>\n<ul class=\"wp-block-list\">\n<li>These States are expected to provide a relatively larger share of \u2018demographic dividend\u2019 to India in future provided attention is paid to the educational and health needs of their populations<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>Instead of using a large number of tax devolution criteria, the transfer of resources to individual States may be guided by the <strong>equalisation principle <\/strong>using a limited number of criteria such as population, area and distance, supplemented by a suitable scheme of grants.\n<ul class=\"wp-block-list\">\n<li>The equalisation principle is <strong>consistent with both equity and efficiency.&nbsp;<\/strong><\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>The dynamics of the emerging fiscal federalism of India entails significant rethinking especially in the context of the 16th Finance Commission.<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-background\" style=\"background-color:#ebecf0\"><tbody><tr><td><span style=\"text-decoration: underline;\"><strong>Mains Practice Question\u00a0<\/strong><br><\/span><strong>[Q]<\/strong> Examine the tax-sharing principles in light of the altered landscape of fiscal federalism in India.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/www.nextias.com\/ca\/wp-content\/uploads\/2024\/01\/Daily-Editorial-Analysis-23-01-2024.pdf\">Download PDF<\/a><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Syllabus: GS 2\/Polity and Governance&nbsp; In Context About Finance Commission\u00a0 Roles and responsibilities Distribution formula\u00a0 Methodology of 15th finance Commission Concerns of various states\u00a0 Suggestions\u00a0 Mains Practice Question\u00a0[Q] Examine the tax-sharing principles in light of the altered landscape of fiscal federalism in India.<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[22],"tags":[],"class_list":["post-20837","post","type-post","status-publish","format-standard","hentry","category-editorial-analysis"],"acf":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/20837","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=20837"}],"version-history":[{"count":4,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/20837\/revisions"}],"predecessor-version":[{"id":20853,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/20837\/revisions\/20853"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=20837"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=20837"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=20837"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}