Constitutional Mandate: Article 270 of the Indian Constitution mandates the sharing of certain taxes levied and collected by the Union with the States.

Divisible Pool: The 'divisible pool' for tax devolution comprises all Union taxes and duties, except for cesses and surcharges, which are typically retained by the Centre.

Vertical Devolution: The Finance Commission recommends the percentage share of the divisible pool that should go to the states as a whole (e.g., 41% by 15th FC).

Horizontal Devolution: The Finance Commission also recommends the criteria for distributing the states' share among individual states. These criteria aim to address horizontal imbalances.

Key Criteria for Horizontal Devolution (15th FC): Income Distance (45%), Population (15% for 2011 census), Area (15%), Forest & Ecology (10%), Demographic Performance (12.5%), Tax & Fiscal Effort (2.5%).

Purpose: To ensure that states have adequate resources to fulfill their constitutional responsibilities, promote balanced regional development, and reduce both vertical and horizontal fiscal imbalances.

Impact on States: States receive a significant portion of their revenue through tax devolution, which is untied funds, giving them flexibility in spending.

Role of Finance Commission: The Finance Commission is the sole constitutional body responsible for recommending the principles and quantum of tax devolution.

Difference from Grants-in-Aid: Unlike grants-in-aid (Article 275), which can be conditional or specific, tax devolution provides untied funds to states.

GST Impact: The introduction of GST changed the nature of indirect tax sharing, but the principle of devolution for central taxes (like corporate income tax, personal income tax) remains crucial.

Constitutional Mandate: Article 270 of the Indian Constitution mandates the sharing of certain taxes levied and collected by the Union with the States.

Divisible Pool: The 'divisible pool' for tax devolution comprises all Union taxes and duties, except for cesses and surcharges, which are typically retained by the Centre.

Vertical Devolution: The Finance Commission recommends the percentage share of the divisible pool that should go to the states as a whole (e.g., 41% by 15th FC).

Horizontal Devolution: The Finance Commission also recommends the criteria for distributing the states' share among individual states. These criteria aim to address horizontal imbalances.

Key Criteria for Horizontal Devolution (15th FC): Income Distance (45%), Population (15% for 2011 census), Area (15%), Forest & Ecology (10%), Demographic Performance (12.5%), Tax & Fiscal Effort (2.5%).

Purpose: To ensure that states have adequate resources to fulfill their constitutional responsibilities, promote balanced regional development, and reduce both vertical and horizontal fiscal imbalances.

Impact on States: States receive a significant portion of their revenue through tax devolution, which is untied funds, giving them flexibility in spending.

Role of Finance Commission: The Finance Commission is the sole constitutional body responsible for recommending the principles and quantum of tax devolution.

Difference from Grants-in-Aid: Unlike grants-in-aid (Article 275), which can be conditional or specific, tax devolution provides untied funds to states.

GST Impact: The introduction of GST changed the nature of indirect tax sharing, but the principle of devolution for central taxes (like corporate income tax, personal income tax) remains crucial.