Vertical Devolution

Vertical devolution refers to the sharing of tax revenue between the Central government and the State governments. As per the concept, Article 270 of the Constitution provides the framework for this. The Finance Commission, a constitutional body, recommends the principles governing this distribution.

In practice, the Central government collects various taxes, and a portion of these taxes is then devolved to the States. The Finance Commission determines the percentage of tax revenue to be devolved, considering factors like population, income distance, and fiscal discipline. This ensures States have resources for their responsibilities.

The key provisions include:

• •Article 270 of the Constitution allows for the sharing of net tax proceeds between the Union and the States.
• •The Finance Commission, constituted every five years, recommends the principles governing vertical devolution.
• •The divisible pool of taxes includes corporation tax, personal income tax, Central Goods and Services Tax (CGST), and Integrated Goods and Services Tax (IGST).
• •The percentage of tax revenue devolved to the States is determined by the Finance Commission, based on factors like population, income distance, area, and fiscal discipline.

Vertical devolution divides the total pool of taxes between the Centre and all the States *as a whole*. Horizontal devolution, on the other hand, divides the *States'* share among the individual States, based on various criteria.

Vertical devolution ensures that States have adequate resources to fulfill their responsibilities for development and welfare. It promotes fiscal federalism by enabling States to implement policies tailored to their specific needs. It also helps in reducing regional disparities by providing more resources to poorer States.

Since independence, the concept of vertical devolution has been present in India. Before the Finance Commission, ad-hoc arrangements were made. The Finance Commission was established in 1951 to provide a more systematic mechanism. Over the years, the percentage of tax revenue devolved to the States has varied based on the recommendations of successive Finance Commissions.

Challenges include debates about including cesses and surcharges in the divisible pool, and States demanding greater fiscal autonomy and a larger share of tax revenue. Balancing equity (addressing the needs of poorer States) and efficiency (incentivizing better fiscal management) is also a challenge.

Suggested reforms include simplifying the formula for devolution, increasing transparency in the process, and addressing the concerns of States regarding fiscal autonomy. There are also suggestions to include cesses and surcharges in the divisible pool to increase the resources available for devolution.

In the UPSC exam, questions may focus on the Constitutional provisions, the role of the Finance Commission, and the components of the divisible pool. Mains questions often require an analysis of the challenges and reforms related to vertical devolution.

A common misconception is that vertical devolution solely benefits poorer States. While it does address equity, it also aims to incentivize better fiscal management in all States. Another misconception is that the Finance Commission's recommendations are binding on the Central government, which is not entirely true.

The future of vertical devolution will likely involve ongoing debates about the optimal level of devolution, the inclusion of cesses and surcharges, and the need for greater fiscal autonomy for States. The recommendations of future Finance Commissions will play a crucial role in shaping this future.

Article 270 of the Constitution is the most important article related to vertical devolution, as it allows for the sharing of net tax proceeds between the Union and the States.