Abstract:
The paper discusses the general backdrop of the Constitutional
and political aspects of the Indian federal structure and the terms of
reference of Finance Commissions since the eleventh which go beyond
the traditional issues of devolution, before proceeding to analyse the
major issues involved in devolution of taxes and grants from Union to
the States in India. The Finance Commissions, since Eleventh have
been assigned the task of incentivising implementation of fiscal reforms
at the State level. Presently, the Finance Commissions face the increasing
challenge of recommending criteria for horizontal devolution meeting
the demand of low income States without being substantially adverse to
the middle income States. Though the States have made a common
demand for an increased share in divisible pool of Central taxes, there
are sharp differences about criteria for horizontal devolution among
them.
The focus of the paper is to suggest an alternate methodology for
horizontal devolution from divisible pool of Central taxes and
disbursement of grants. Tax devolution criteria suggested are population
and gap of per capita own tax revenue of a State from the average of
highest three States worked on a normative basis. Methodology for
normatively estimating expenditure requirements of States are also
attempted in this paper. It is suggested that for grant disbursement, the
Finance Commissions need to become the prime agency.
