- Prelims: Current events of national importance(Federalism, Finance Commission, Cess and Surcharges, NITI Ayog, etc)
- Mains GS Paper II & III: Functions and responsibilities of the union and the states, issues and challenges pertaining to the federal structure etc
ARTICLE HIGHLIGHTS
- States have been facing a decline in their share out of the resources transferred from the Centre to the States, from Finance Commission to Finance Commission as complained by many states.
INSIGHTS ON THE ISSUE
Context
Finance Commission:
The vertical and horizontal dimensions
- The Fourteenth Finance Commission raised the share of States in the divisible pool of central taxes to 42% from 32%.
- This was revised to 41% when the number of States in India was reduced to 28.
- During 2020-21 to 2023-24 (BE): The effective share of States in the Centre’s gross tax revenues (GTR) averaged close to 31%
- It was significantly lower than the corresponding share of nearly 35% during 2015-16 to 2019-20.
- The increase in the share of cesses and surcharges to 5(eighteen point five)% of the Centre’s GTR during 2020-21 to 2023-24 (BE) from 12.8(twelve point eight)% during 2015-16 to 2019-20.
Twelfth Finance Commission to the Fifteenth Finance Commission (final report):
- In the case of the southern States, there has been a steady fall in their share, from 785% to 15.800%.
- In a comparison of these two Commissions, the northern and eastern States have also lost.
- The ‘gainer States’ were the hilly, central, and western States including Maharashtra.
The distance criterion
● The shares of individual States in tax devolution depend on the criteria and the weights used by different Commissions.
● The distance criterion has been accorded the highest weight amongst these criteria.
● Its weight was reduced from 50% to 47.5% by the Thirteenth Finance Commission and further reduced to 45% by the Fifteenth Finance Commission.
● The Eleventh Finance Commission had given this criterion a weight of 62.5%.
● The equalization principle has been regarded as a key principle governing distribution. Economic and social justice demand this.
- On account of the distance criterion, low-income States such as Bihar and Uttar Pradesh have gained over time
- They have lost on account of other criteria.
- Bihar and Uttar Pradesh show, in terms of their overall share, a loss of 970% points and 1.325% points.
Reasons for loss and gain:
- The main reason for the loss of the southern States is the income distance criterion
- Distance criterion means that the farther a State is from the highest income State, the higher its share.
- The main reason for the gain of the hilly States is area/forest criterion.
- Between these two Finance Commissions, the loss to the southern States due to the distance criterion amounted to 8.055% points
- The overall loss was much less at 3.985% points, implying that there was a gain under other criteria.
Population criterion:
● Until the Fourteenth Finance Commission, the data for the population in 1971 was used.
● For the Fifteenth Finance Commission, data for the population in 2011 was used.
● In order not to penalize States that showed better performance in reducing fertility rates, the demographic change criterion was introduced.
● The joint impact of these two changes has been marginal for all groups of States.
○ For Tamil Nadu, the joint impact was marginally positive.
Way Forward
- The Sixteenth Finance Commission can consider reducing its weight while correspondingly raising the weights attached to other criteria.
- While accepting the recommendation of the Fourteenth Finance Commission to raise the share of all States to 42% from 32%, the Centre increased the cesses and surcharges, thereby reducing the size of the divisible pool.
- This is not desirable.
- Limit the share of cesses and surcharges to 10% of the Centre’s gross tax revenues.
- Address the issue raised by some of the States regarding their declining shares.
- The major factor contributing to this situation is the adoption of income distance criterion and giving it a weight as high as 45%.
- The Finance Commission can reduce the weight of this criterion by 5% to 10% points.
- Cesses and surcharges may be subjected to some upper limit by the Sixteenth Finance Commission.
QUESTION FOR PRACTICE
How far do you think cooperation, competition and confrontation have shaped the nature of federation in India ? Cite some recent examples to validate your answer.(UPSC 2020) (200 WORDS, 10 MARKS)
