UPSC Prelims 2023 Question:

Consider the following

1. Demographic performance
2. Forest and ecology
3. Governance reforms
4. Stable government
5. Tax and fiscal efforts
   
   

For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?

Explanation:

• The Finance Commission (FC) is a constitutional body that recommends how the central government should share its tax revenues with the states and local bodies.
  
  
• Horizontal devolution refers to the distribution of funds among the states based on certain criteria such as population, income, area, forest cover, etc. 
  • The 15th FC has made some changes in the horizontal devolution formula compared to the previous FCs. For example, it has reduced the weightage of population based on 1971 census from 17.5% to 15%, and increased the weightage of population based on 2011 census from 10% to 12.5%. It has also introduced a new criterion of demographic performance, which rewards the states that have controlled their population growth. The 15th FC has also increased the share of grants-in-aid for local bodies from 2.5% to 4% of the divisible pool of taxes. These changes have implications for the fiscal autonomy and equity of the states and local bodies in India.
  • Based on principles of need, equity and performance, overall devolution formula is as follows:

Therefore, option (2) is the correct answer. 

Subject: Economics | Public Finance