Sharing of Tax Revenues: A Review of Horizontal Devolution

Abstract

The Constitution has adopted three- tier federal structure i.e. Union, State and local bodies. In India the role of fiscal federalism is not only related to taxation and expenditure responsibilities, but also to the systematic levels within the government. The Article 280 of the Constitution mandates that the President will appoint a Finance Commission (FC) every five years, or sooner, to make recommendations on how to divide the net proceeds of Union taxes. The divisible pool of Centre taxes is commonly known as Consolidated Fund The ToR of President works as the guiding source for the Vertical devolution (Share of Union taxes between Centre and States) and Horizontal devolution (Share of the States in Union taxes to be distributed amongst Staes). The main challenge faced by the FCs includes the talking of ‘Horizontal Devolution’ i.e. how to apportion the States’ share amongst States. Sixteenth FC 2026-31 defines, “Horizontal devolution refers to allocating the portion of divisible pool assigned to States among individual states.” The current Commission is the 16th FC in continuation with the first Commission appointed in 1951. To resolve the issues related to regional imbalances previous Finance Commissions followed the principle of equity and efficiency. 14th Finance Commission tried to alleviate the difference of fiscal capacity and cost disability amongst States. The 15th Finance Commission utilized a multi-criteria formula to distribute the funds. For horizontal distribution suggestion of the States has also been a guiding force. The paper seeks to observe the issues related to horizontal devolution as a corrective measure to regional imbalances. The formulaic modus operandi of the recent FC’s will be taken as a reference to assess the devolution criterion of the current FC.