Have States gained from the 16th FC?, Pg10

Key Highlights:

• The 16th Finance Commission (FC), chaired by Dr. Arvind Panagariya, submitted its report for 2026-31, which the Central government has accepted regarding fund devolution from the Centre to States.
• The Constitution's Article 270 outlines the distribution of net tax proceeds between the Centre and States, based on the Finance Commission's recommendations every five years as per Article 280.
• The 16th FC recommended maintaining the States’ share in vertical devolution at 41%, citing States’ share in total tax revenues, Union spending in CSS, and the Union government's need for funds for defense and infrastructure.
• A new criterion of State's contribution to GDP has been added for horizontal devolution, balancing gradual changes and recognizing efficiency and States’ contributions to growth.

Detailed Insights:

• The divisible pool, which excludes cess and surcharge levied by the Centre, is estimated to constitute around 81% of the Centre's gross tax revenue for 2025-26.
• Before the 14th FC (2015-2020), devolution involved specific transfers for Centrally Sponsored Schemes (CSS) with conditionalities, but these were discontinued, and vertical devolution increased from 32% to 42%.
• The 15th FC (2020-2026) revised vertical devolution to 41% due to the reorganization of Jammu and Kashmir into two Union Territories.
• States demanded an increase in their share to 50%, inclusion of cess and surcharge in the divisible pool, and a cap on cess and surcharge levied by the Centre.
• Industrialized States advocated for including States’ contribution to GDP among the horizontal devolution criteria.
• The 16th FC opined that capping cess and surcharge or including them in the divisible pool is neither permissible nor desirable under the present constitutional scheme.
• The share of southern and western States has marginally increased, while the share of big north and central States has marginally decreased, indicating a directional change towards recognizing efficiency.
• The FC suggested the Centre should progressively reduce raising revenues through cess and surcharge, and States should make subsidies efficient, pursue power sector reforms, and control fiscal deficits and debt.

Key Concepts Involved:

• Vertical Devolution: The division of taxes between the Union and the States.
• Horizontal Devolution: The distribution of tax revenue among the States.
• Divisible Pool: The net proceeds of taxes that are shared between the Centre and the States.
• Cess and Surcharge: Taxes levied by the Union, which are not part of the divisible pool.