Tax devolution refers to the distribution of tax revenues between the central government and the state governments.
The office of the country’s finance minister Nirmala Sitharaman recently said on the micro blogging platform X that the Devolution of Direct Taxes to states happens as per the recommendation given by the Finance Commission. The SGST goes 100 per cent to the states. IGST is collected because it involves a lot of inter-state payments and is periodically reviewed by the GST Council. Because the states should get money in their hands, roughly 50 per cent is divided and then periodically it is readjusted to actuals. CGST is divided as per the advice of the Finance Commission. The rate of devolution to the states has nothing to do with the Government of India and it is recommended by the Finance Commission.
“I don’t have the right to change as per my whims & fancies that I like a state or not.
Implementation of Finance Commission’s recommendation is done without any kind of fear or partiality. The systems are well placed. These are false narratives promoted by the vested interests to suit their agenda. If the state government is spending on something it’s not supposed to spend on, I’m not questioning it. They can do it but then don’t put the blame on the Centre. If the expenditure is going into areas which can’t be sustained by your budget, then I’m not answerable for it. Constitutionally, unless the Finance Commission permits me, I can’t do things. I don’t have discretion to play around with the recommendations of the Finance Commission,” Sitharaman said in response to a question raised by MP Adhir Chowdhury during Question Hour in Lok Sabha.
Irked off these updates in the tax devolution, Karnataka Chief Minister Siddaramaiah came to Delhi and protest at Jantar Mantar. Here the question arises on Tax Devolution many people don’t know about its nitty gritty. Let’s dive deep on the history and evolution of the Tax Devolution today.
History of Tax Devolution
The Finance Commissions: Before understanding and comprehending the history of Tax devolution one should know the commencement of the Finance Commissions way back in the history. These Commissions are periodically constituted by the President of India under Article 280 of the Indian Constitution to define the financial relations between the central government of India and the individual state governments. This Article 280(3)(a) of the Constitution of India mandates that the Finance Commission has the responsibility to make recommendations regarding the division of the net proceeds of taxes between the Union and the states. The First Commission was established in 1951 under The Finance Commission (Miscellaneous Provisions) Act, 1951. Fifteen Finance Commissions have been constituted since the promulgation of Indian Constitution in 1950. Individual commissions operate under the terms of reference which are different for every commission, and they define the terms of qualification, appointment and disqualification, the term, eligibility and powers of the Finance Commission. As per the constitution, the commission is appointed every five years and consists of a chairman and four other members. The Devolution of Taxes to states happens as per the recommendation given by the Finance Commission.
Tax devolution refers to the distribution of tax revenues between the central government and the state governments. It is a constitutional mechanism established to allocate the proceeds of certain taxes among the Union and the states in a fair and equitable manner.
Distribution of Tax Proceeds:
The Finance Commission recommends the distribution of the net proceeds of taxes between the Union government and the state governments. This ensures a fair and equitable sharing of tax revenues, taking into account the fiscal capacities and needs of the states.
The Finance Commission determines the principles and quantum of grants-in-aid to states that require financial assistance. It assesses the financial needs of states and recommends measures to allocate funds from the consolidated funds of the states.
Augmenting Resources of Local Governments: The Finance Commission suggests measures to augment the consolidated fund of a state in order to supplement the resources of Panchayats and Municipalities in that state. The Finance Commission’s functioning is characterized by extensive consultations with all levels of governments, promoting the principle of cooperative federalism. It engages in consultations with the central government, state governments, and other stakeholders to gather inputs and ensure a participatory approach in decision-making.
The recommendations of the Finance Commission are aimed at improving the quality of public spending and promoting fiscal stability. By evaluating the financial position of the Union and state governments, the Commission provides guidance on fiscal management, resource allocation, and expenditure priorities.
What is the 15th Finance Commission?
The Finance Commission 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 15th Finance 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. Separate heads of taxation are no head of taxation in the Concurrent List (Union and the States have no concurrent power of taxation).[8] The list of thirteen Union heads of taxation and the list of nineteen State heads are given below:
Central government of India