a tr t re in ndia 17.15
with lower per capita NSDP will receive Union taxes in a fundamental way—dropping the
more than those with a higher per Article 272 and substantially changing the Article
capita NSDP. This results from the fact 270. The new Article 270 provides for sharing of
that CAS transfers, which tended to be all the taxes and duties referred to in the Union
discretionary, were less progressive than List putting all in a ‘divisible pool’. There are some
Finance Commission transfers. exceptions to it. The taxes and duties referred in
To be sure, there will be transitional costs the Articles 268 and 269 of the Constitution,
entailed by the reduction in CAS transfers. But the together with surcharges and cesses on taxes and
scope for dislocation has been minimised because duties (referred in the Article 271) and any cess
the extra FFC resources will flow broadly to the levied for specific purposes—do not fall under this
states that have the largest CAS-financed schemes. ‘pool’.
The far-reaching recommendations of the The new arrangement of tax devolution
FFC, along with the creation of the NITI Aayog, came as a follow-up to the recommendations of
will further the government’s vision of cooperative the 10th FC (1995–2000) which the FC termed
and competitive federalism. The necessary, indeed as the ‘Alternative Method of Tax Devolution’
vital, encompassing of cities and other local bodies (AMD). A concensus between Union and States
within the embrace of cooperative and competitive was a advised by the FC for such an arragnement
federalism is the next policy challenge, which is to be effected. States were going to get extra 5 per
believed to be strengthened by the body NITI cent share in the Union taxes in the AMD, thus, a
Aayog. serious demand came from them—ultimately, the
AMD was accepted by the Centre. To make the
concepTs relaTed To fc AMD irreversible, the Goverment of India went
for the 80th Amendment in the Constituion.
tAx Devolution
grAnts-in-AiD
Advising a formula to distribute the Union tax
proceeds between Union and the States is the most Though, tax devolution (from the Divisible Pool)
important task of a FC, as the share of states in the is the primary instrument to attend the issue of
net proceeds of Union taxes is the predominant ‘horizontal imbalances’ of revenue accruing to
channel of resource transfer from the Centre to the states, the grants-in-aid is a complimentary/
states. secondary instrument regarding the same. As per
the Article 275, the FC recommends the principles
Divisible Pool as well as the quantum of grants to those states
It is that portion of gross tax revenue which is which are in need of assistance – different sums
distributed between the Centre and the States. may be fixed for different states (one of the pre-
The divisible pool consists of all taxes, except requisites for such grants is the assessment of the
surcharges and cess levied for specific purpose, net needs of the states). The 1st FC had laid down five
of collection charges. broad principles for determining the eligibility of a
Before the 80th Constitution Amendment state for grants:
(2000), the sharing of the Union tax revenues with (i) The Budget of a state as the starting point
the states was in accordance with the provisions for examination of a need.
of articles 270 and 272, as they stood then. This (ii) The efforts made by states to realize the
amendment altered the pattern of sharing of potential.