Tax Devolution

Context:

Centre releases Rs 1.39 trillion instalment of tax devolution to states

Devolution of Taxes to States:

• Provided under – Article 270 of the Constitution
• It provides for distribution of net tax proceeds collected by the Union government (corporation tax, personal income tax, central GST, etc.) between Union and states. 
• Devolution is based on – Recommendation of the Finance Commission (FC)
  • FC is constituted every 5 years as per Article 280.
• The divisible pool does not include cess and surcharge levied by the Centre.

Basis of Devolution:

• Vertical Devolution – Share of states from divisible pool
  • Presently stands at 41% (based on the recommendations of the 15th FC)
• Horizontal Devolution – Distribution among the states from the share allocated to states, based on various criteria.
  • Assigned criteria with their weights –
    • Income Distance (45%)
    • Area (15%)
    • Population, 2011 (15%)
    • Demographic performance (12.5)
    • Forest and Ecology (10%)
    • Tax and fiscal efforts (2.5%)

Source: PIB

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Previous Year Question

Consider the following:
1. Demographic performance
2. Forest and ecology
3. Governance reforms
4. Stable government
5. Tax and fiscal efforts
For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?

[UPSC Civil Services Exam – 2023 Prelims]

(a) Only two
(b) Only three
(c) Only four
(d) All five

Answer: (b)
Explanation:
Criteria for horizontal devolution (Allocation Between the States) include: Income distance, area, population (2011), demographic performance, forest and ecology, and tax and fiscal efforts.

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