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Finance Commission and Their Formula for Sharing Taxes

[4] The 14th Finance Committee had used the parameters of 1971 and 2011 to formulate decentralization to the States. However, this was the first time that a CF was tasked with completely abandoning the use of the parameter in 1971. The Commission recommended that the Union set up a GST compensation fund. This compensation is intended to remedy 100% of the shortfall in the first year, 75% in the second year and 50% in the third year. This additional budgetary burden for the Union government should be seen as an investment to generate returns in the medium and long term. Demographic performance is measured using statistics known as the “total fertility rate”. The total fertility rate (TFR) is the average number of children born to a fertile woman during her reproductive years. The inversion of the ISF was replaced by the 15th century. Finance Commission used to calculate demographic performance. For example, if the typical woman giving birth has two children in Gujarat, the Gujarat TFR will be 0.5. The Commission recommended that the reimbursement of expenses incurred by the defence forces be reviewed so as not to affect their effectiveness in disaster relief. The Commission recommended that the Rail Tariff Authority (RTA) should promptly replace the advisory body with a statutory body with the necessary amendments to the Railways Act 1989.

The 12th Finance Committee was established in November 2002 by the President of India under the chairmanship of former RBI Governor and well-known economist Dr. C Rangarajan. The Commission presented its recommendation in November 2004 and recommended that the share of States be maintained at 30.5 per cent of the divisible pool of central taxes. Its recommendations covered the period from April 2005 to March 2010. The Finance Committee uses certain criteria to decide on decentralization to the States. For example, the income distance criterion was used by the 14th and 15th Finance Committees. According to this criterion, countries with low per capita income would receive a higher share in order to maintain equality between States. Another example is the demographic performance criterion, which was introduced by the 15th Finance Committee. The criterion of demographic performance is to reward the efforts of States to control their populations. A similar criticism is also made of the use of the “Tax Effort” parameter.

Tax Effort was previously used by the 11th and 12th Finance Committees. On the 15th. The Finance Committee calculated the tax burden by multiplying the 2011 population by the ratio of its own tax revenues (OTR) [8] to the GSDP (Gross Domestic Product of the State), as opposed to previous commissions, where they only used the OTR-GSDP ratio as a criterion for calculating the share between states. The 15th Finance Committee made some changes to the parameters used for the decentralization formula. There are three notable changes: the Commission found that the allocation based on outdated demographic data was not equitable and assigned a weight of 17.5% to the 1971 population and 10% to the 2011 population in order to take into account demographic changes since 1971 in terms of migration and age structure. Central taxes allocated to states are unrelated funds, and states can issue them at their own discretion. Over the years, taxes transferred to states have accounted for more than 80% of total central transfers to states (Figure 1). The Centre also provides grants to states and local bodies that are to be used for specific purposes. These subsidies ranged from 12% to 19% of total transfers.

The Commission has given a 50% weighting to the abolition of revenues, as this is the only measure of budgetary capacity. It is the distance between the real per capita income of a state and that of the state with the highest per capita income. The Commission calculated the income gap using the 12th Commission method. For the twenty-nine states, a three-year average (2010-11 to 2012-13) per capita, comparable GSDP, was assumed. The income distance was calculated by taking the state`s distance from the highest GSDP per capita. Goa had the highest, followed by Sikkim. As these two states are very small, the income distance from the third, Haryana, was calculated. Goa, Sikkim and Haryana are allocated the same distance as for Haryana. The decentralization process used to be based on many complex formulas. But now things have changed.

In this article, we`ll help you understand how states derive revenue from the center. A distinctive feature of the financial relations between the Union and the Indian States is the explicit recognition in the Constitution of the different nature of the need and the provision of regular review of the situation by a judicial-type body. Article 280 of the Constitution provides for the appointment of a Finance Committee by the President. As regards the compulsory allocation of Union taxes and subsidies, Article 280 provides for a Finance Committee. It is appointed every five years or earlier to make recommendations to the President on the distribution of shared taxes, subsidies and all other matters submitted to the Commission. The Commission shall consist of a Chairperson and four other members. The Commission has an enormous responsibility to make the necessary recommendations to the President of India. The Finance Committee consists of a Chairman and four members appointed by the Chairman. The 15th Finance Committee used the following criteria to determine the share of states: (i) 45% for income suppression, (ii) 15% for population in 2011, (iii) 15% for area, (iv) 10% for forest and ecology, (v) 12.5% for population performance and (vi) 2.5% for tax expenditures. For 2020-21, the Commission recommended a total decentralization of Rs 8,55,176 crore to the states, which corresponds to 41% of the divisible tax pool. This is 1% less than the percentage recommended by the 14th Finance Committee. When allocating the 41% among states, the formula recommended using the Finance Commission – which takes into account various parameters such as income distance, 2011 population, area, forest and ecology, demographic performance and tax expenditures.

Finance Committee and its tax-sharing formulas The Finance Committee is responsible for the regular review and resolution of the central government`s budgetary problems. The fathers of the Indian Constitution clearly intended to examine all matters relating to the normal budgetary adjustments of the central government by the Finance Committee, which was given a leading role in solving the problems of fiscal federalism. An accidental and significant benefit of appointing a finance commission was generally to revive interest in issues of financial relations between the Centre and the states and to promote an informed national debate on the various facets of India`s federal fiscal structure. The role of the Indian Finance Commission is unique in many ways. It is one of the few commissions provided for in the Constitution. It has no equivalent with the established Federal Constitutions. The first Finance Committee was appointed in 1951 and twelve Finance Committees have reported so far. .

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