Question Q.14GS2GS2
How is the 'vertical' and 'horizontal' devolution of taxes to the states decided? Highlighting the concerns raised by some states regarding the devolution of taxes, suggest corrective measures.
Main Body
Recently President constituted the 15th FCC under Act 280 of Constitution to decide vertical and horizontal devolution of taxes to states. Vertical and horizontal devolution of taxes to states Role of Finance CommissionTerms of Reference TOR41% devolved vertically to states by 15th FCC Vertical: Divided pool of taxes used by TORMore incentives to good performing state Horizontal: Forest, Population, tax effort, income distance, etc.
(ex.) 2-8 lakh crore was devolved by 15th FCC to Local bodies as part of horizontal devolution. Concerns raised by states: 1) "Development Paradox" (ex.) Kerala. More developedLess income distance, more increased borrowing need (ex.) 3 lakh crore of Kerala (6061) 2) Inequality in distribution (ex.) for 2 constitutedBihar gets 0.08 back, TN gets 0.08 back 3) Fiscal annihilation: due to demographic performance by southern states. 4) Increased share of cess and surchargedon't from pool of divisible pool of state Corrective measures needed:- 1) Following states regular devolution by centre to states 2) Changing criteria of devolution by 16th FCCmore incentives to good performing state. 3) Utilization of Inter-state Council, NITI Aayog governing council must iron out differences. Moreover principles of Fiscal federalism as given by NK Singh need to be followed in letter and spirit by 16th FCC to ensure justice to developing and developed state alike.
226 words1 paragraphs
Topper
MADHVENDRA PRATAP SINGH
AIR 1532025
Subject & Paper
GS2GS2
Topic
Federal Structure - Functions, Responsibilities, Devolution of Powers and Finances
Centre-State Financial Relations
Vertical and Horizontal Tax Devolution
Writing Stats
226
Total words
1
Paragraphs