Tax devolution

 

Context:

  • Finance Minister Smt. Nirmala Sitharaman authorises release of advance instalment of tax devolution to State Governments amounting to Rs.47,541 crore
  • States receive a total of Rs.95,082 crore during January 2022
  • With release of the 2nd advance installment, States receive an additional amount of Rs.90,082 crore under tax devolution over and above budgeted amount

Background:

  • The Finance Commission (FC)is a constitutional body, that determines the method and formula for distributing the tax proceeds between the Centre and states, and among the states as per the constitutional arrangement and present requirements.
  • Under Article 280 of the Constitution, the President of India is required to constitute a Finance Commission at an interval of five years or earlier.
  • The 15thFinance Commission was constituted by the President of India in November 2017, under the chairmanship of NK Singh. Its recommendations will cover a period of five years from the year 2021-22 to 2025-26.

Vertical Devolution (Devolution of Taxes of the Union to States):

  • It has recommended maintaining the vertical devolution at 41% .
  • It is at the same level of 42% of the divisible pool as recommended by the 14th Finance Commission.
  • It has made the required adjustment of about 1%due to the changed status of the erstwhile State of Jammu and Kashmir into the new Union Territories of Ladakh and Jammu and Kashmir.

 

Horizontal Devolution (Allocation Between the States):

  • For horizontal devolution, it has suggested 5% weightage to demographic performance, 45% to income, 15% each to population and area, 10% to forest and ecology and 2.5% to tax and fiscal efforts.

Conclusion:

  • Thus, States would receive a total of Rs.95,082 crore or double their respective entitlement during the month of January 2022.
  • It is pertinent to mention that the Government of India had released the first advance instalment of tax devolution amounting to Rs.47,541 crore to States on 22ndNovember 2021. With the release of the second advance installment today, the States would have received an additional amount of Rs.90,082 crore under tax devolution over and above what has been budgeted to be released till January, 2022.

Source: THE HINDU.

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