Why in the News
The 16th Finance Commission has retained the size of the tax pool for States but reshaped the grants that equalise between them. The tension is between fiscal efficiency and the constitutional intent of equity across unequal States.
What is the Finance Commission?
- Constitutional body: The Finance Commission is set up under Article 280 every five years to recommend the sharing of taxes between the Union and the States.
- Vertical devolution: It fixes the share of central taxes that goes to States as a whole.
- Horizontal devolution: It sets the formula distributing that share among individual States.
What has the 16th Finance Commission changed?
- Pool unchanged: Vertical devolution stays at 41% of the divisible pool.
- Grants cut: Revenue Deficit Grants and most sector and State specific grants are eliminated.
- Grants share halved: Grants in aid fall from 19.4% to 8.3% of transfers.
- New weight: A 10% GDP contribution weight is added and the income distance weight is trimmed.
Why do the changes raise equity concerns?
- Rewarding the rich: A GDP contribution weight favours already prosperous States.
- Removing the equaliser: Revenue Deficit Grants had cushioned States that cannot meet committed expenditure.
- Constitutional intent: Grants in aid under Article 275 are meant to lift weaker States, not shrink.
“[2023] 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?
(a) Only two
(b) Only three
(c) only four
(d) All five