What is Divisible Pool of Taxes?
Historical Background
Key Points
8 points- 1.
Comprises the net proceeds of all Union taxes and duties, specifically excluding cesses and surcharges.
- 2.
The percentage share of states in this pool (vertical devolution) is determined by the President based on the recommendations of the Finance Commission (Article 280).
- 3.
The Finance Commission also determines the inter-se distribution (horizontal devolution) among states based on various criteria like population, area, forest cover, income distance, fiscal effort, and demographic performance.
- 4.
Article 270 of the Constitution deals with taxes levied and distributed between the Union and the States.
- 5.
The divisible pool is a major source of untied revenue for state governments, ensuring their financial stability and autonomy.
- 6.
The exclusion of cesses and surcharges from this pool reduces the total amount available for states, leading to concerns about fiscal centralization and reduced state fiscal space.
- 7.
The 15th Finance Commission recommended states' share to be 41% of the divisible pool for the period 2021-26 (a slight adjustment from 42% due to the creation of J&K as UTs).
- 8.
The Goods and Services Tax (GST) is also a consumption tax shared between the Centre and states, managed by the GST Council, and its proceeds contribute to the overall fiscal transfers.
Visual Insights
Divisible Pool vs. Cesses & Surcharges
Key differences between the divisible pool of taxes and cesses & surcharges.
| Feature | Divisible Pool | Cesses & Surcharges |
|---|---|---|
| Sharing with States | Shared between Centre and States | Not shared with States |
| Purpose | General revenue for States | Specific purposes (e.g., health, education) |
| Recommendation by | Finance Commission | Central Government |
| Inclusion in Devolution | Included in 41% devolution | Excluded from devolution |
Recent Developments
4 developmentsImplementation of the 15th Finance Commission's recommendations on the share and distribution criteria for the divisible pool.
Ongoing debate about the increasing proportion of cesses and surcharges, which effectively shrink the size of the divisible pool available for states.
States continue to advocate for a larger share and inclusion of more taxes in the divisible pool to enhance their fiscal autonomy.
Impact of GST on the divisible pool and overall Centre-state financial relations, particularly the compensation mechanism.