Hindu Editorial Analysis: 23-January-2024
The Finance Commission, a constitutional body established by the President of India, plays a crucial role in suggesting guidelines for centre-state financial relations. Article 280(1) of the Constitution outlines the modalities for its formation. Currently, 41 percent of Centre-collected taxes are devolved among states in 14 instalments during a fiscal year. The Fifteenth Finance Commission, constituted in 2017, has recommendations valid until the financial year 2025-26.
Roles and Responsibilities
The Finance Commission’s primary tasks include recommending the proportion of Union tax revenues assigned to states and determining the share of each state in the allocated tax revenue.
Distribution Formula: Balancing Equity and Efficiency
The Commission formulates a distribution formula based on principles of equity and efficiency. Equity considerations prioritize revenue-scarce and high-expenditure states, ensuring they receive larger shares. Efficiency, on the other hand, rewards states proficient in revenue collection and spending rationalization. Striking a balance between equity and efficiency remains a dynamic challenge across successive Finance Commission recommendations.
Methodology of the 15th Finance Commission
The 15th Finance Commission introduces a distribution formula emphasizing tax effort (2.5% weight) and demographic performance (12.5% weight). The remaining 85% weight is distributed among equity indicators, including per capita income, 2011 Census population data, area, forest cover, etc. Notably, fertility rate inclusion incentivizes states that successfully reduce fertility levels.
Concerns of States: A Controversial Landscape
The contentious issue of revenue sharing among states triggers complaints, particularly from southern states, citing smaller shares despite significant tax contributions. Some states argue that their higher contributions to Union tax revenue entitle them to more substantial shares. However, Finance Commissions historically favored assigning over 75% weight to equity indicators, leading to ongoing concerns.
Efficiency Indicator Dilemma
While tax contribution serves as an efficiency indicator, Finance Commissions allocate only 10-20% weight to it. This creates an ongoing dilemma, with some states advocating for a more significant emphasis on efficiency indicators in revenue sharing.
Why In News
The Finance Commission’s recommendations, while essential for fiscal equity, have often sparked tensions between States and the Centre, emphasizing the need for a collaborative and transparent dialogue to address divergent concerns.
MCQs about Friction and Dilemmas in Finance Commission Recommendations
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What is the primary role of the Finance Commission in India’s financial structure?
A. Implementing tax policies
B. Allocating Union tax revenues among states
C. Auditing state expenditures
D. Advising on foreign investments
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What are the key principles underlying the Finance Commission’s distribution formula?
A. Revenue contribution and population density
B. Equity and efficiency
C. Industrial development and education levels
D. Geographical size and cultural diversity
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In the 15th Finance Commission, what novel factor was introduced into the distribution formula?
A. Industrial output
B. Fertility rate
C. Educational attainment
D. Health expenditure
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What is a recurring concern raised by states, particularly in southern India, regarding Finance Commission recommendations?
A. Excessive taxation
B. Lack of transparency
C. Smaller shares despite significant tax contributions
D. Overemphasis on efficiency indicators
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