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Tax Devolution

  • 15 Jun 2023

Recently, the Union government released the 3rd Installment of Tax Devolution to state governments amounting to Rs 1,18,280 crore in June 2023, as against the normal monthly devolution of Rs 59,140 crore.

  • Uttar Pradesh received the highest (Rs 21,218 crore) followed by Bihar (Rs 11,897 crore), Madhya Pradesh, West Bengal and Rajasthan.

About Tax Devolution

  • It 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.
  • Article 280(3) (a) of the Constitution of India mandates that the Finance Commission (FC) has the responsibility to make recommendations regarding the division of the net proceeds of taxes between the Union and the states.

Recommendations of 15th Finance Commission on Tax Devolution

Share of States in Central Taxes (Vertical Devolution)

  • The share of states in the central taxes for the 2021-26 period is recommended to be 41%, same as that for 2020-21.
  • This is less than the 42% share recommended by the 14th Finance Commission for 2015-20 period.
  • The adjustment of 1% is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the centre.

Horizontal Devolution (Allocation between the States)

  • For horizontal devolution, it has suggested 12.5% 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.PM inaugurates first-ever National Training Conclave