Central fiscal transfers
The measurements, both horizontal and vertical:
- States now get a 42% portion in the divisible pool of central taxes, up from 32% under the Fourteenth Finance Commission.
- After India’s states were whittled down to 28, this was adjusted to 41%.
- Between 2020–2021 and 2023–2024 (BE), the States’ effective contribution to the Center’s gross tax revenues (GTR) averaged over 31%.
- It was far less than the comparable share, which was close to 35% between 2015–16 and 2019–20.
- the increase in cesses and surcharges from 12.8 (twelve point eight)% of the Center’s GTR during 2015–16 to 2019–20 to 5 (eighteen point five)% during 2020–21 to 2023–24 (BE).
Final report from the Twelfth Finance Commission to the Fifteenth Finance Commission:
- The percentage of the southern states has steadily decreased, going from 785% to 15.800%.
- When these two Commissions are compared, the States in the north and east have likewise lost.
- The hilly, central, and western States, including Maharashtra, were known as the “gainer States.”
The distance requirement:
- The weights and criteria applied by several Commissions determine each State’s portion of tax devolution.
- Of these factors, the distance criterion has been given the most weight.
- The Thirteenth Finance Commission lowered its weight from 50% to 47.5%, and the Fifteenth Finance Commission further decreased it to 45%.
- The Eleventh Finance Commission assigned a weight of 62.5% to this criterion.
- One of the main ideas controlling distribution is the equalisation concept. This is required for social and economic justice.
- Due to the distance requirement, low-income states like Uttar Pradesh and Bihar have benefited over time.
- Other factors have caused them to lose.
- Bihar and Uttar Pradesh exhibit a decline of 970% and 1.325% points, respectively, concerning their aggregate percentage.
Causes of gain and loss:
- The income distance criterion is the primary cause of the southern states’ decline.
- According to the distance criterion, a state’s share increases with its distance from the state with the highest income.
- The area/forest criterion is the primary cause of the hilly States’ growth.
- The southern states lost 8.055% of their points as a result of the distance criterion between these two Finance Commissions.
- At 3.985% points, the overall loss was significantly smaller, suggesting that there was a gain according to other criteria.
Population standard:
- Until the Fourteenth Finance Commission, the 1971 population statistics were utilised.
- The Fifteenth Finance Commission was based on population data from 2011.
- The demographic change criterion was introduced to avoid penalising States that demonstrated superior performance in reducing fertility rates.
- These two modifications have had a negligible combined effect on all State groups.
- In Tamil Nadu, the combined effect was somewhat favourable.
The Way Ahead:
- The sixteenth Finance Commission may decide to lighten its own weight while increasing the weights of other criteria in proportion.
- The Fourteenth Finance Commission recommended that all States increase their contribution to 42% from 32%. However, the Centre increased cesses and surcharges, which resulted in a smaller divisible pool.
- Set a 10% ceiling on the portion of cesses and surcharges that go towards the Center’s gross tax income.
- The implementation of the income distance criterion and its 45% weighting are the main factors causing this situation.
- This criterion’s weight may be decreased by the Finance Commission by five to ten percentage points.
- The Sixteenth Finance Commission may set an upper limit on cesses and surcharges.
