What is Divisible Pool?
Historical Background
Key Points
11 points- 1.
The Finance Commission, constituted every five years, recommends the principles governing the distribution of the divisible pool.
- 2.
Article 270 of the Constitution provides the legal basis for the sharing of taxes between the Centre and States.
- 3.
The divisible pool primarily consists of taxes like personal income tax, corporation tax, CGST, and IGST.
- 4.
The percentage of the divisible pool allocated to States is called vertical devolution. The 15th Finance Commission recommended 41% vertical devolution.
- 5.
Horizontal devolution refers to the distribution of the States' share among themselves based on criteria like population, area, income distance, and demographic performance.
- 6.
Cesses and surcharges levied by the Centre are generally *not* part of the divisible pool, leading to disputes with States.
- 7.
The recommendations of the Finance Commission are generally binding on the Central government, though not legally enforceable in court.
- 8.
The divisible pool helps to address fiscal imbalances between richer and poorer States, promoting equitable development.
- 9.
The size of the divisible pool is directly related to the overall economic performance and tax collection efficiency of the country.
- 10.
Changes in tax laws, such as the introduction of GST, can significantly impact the composition and size of the divisible pool.
- 11.
The inclusion of a state's contribution to GDP as a criterion for horizontal devolution, as proposed by the 16th Finance Commission, aims to balance equity with efficiency.
Visual Insights
Divisible Pool: Components and Implications
Mind map showing the components of the divisible pool and its implications for fiscal federalism.
Divisible Pool
- ●Components
- ●Vertical Devolution
- ●Horizontal Devolution
- ●Impact on States
Recent Developments
7 developmentsThe 15th Finance Commission submitted its report for the period 2021-26, recommending a vertical devolution of 41%.
The 16th Finance Commission, chaired by Dr. Arvind Panagariya, has submitted its report for the period 2026-31.
States have been demanding a larger share of the divisible pool, citing increased responsibilities and developmental needs.
There are ongoing debates about including cesses and surcharges in the divisible pool to increase States' revenue.
The introduction of GST has simplified the tax structure but also raised concerns about revenue losses for some States.
The 16th Finance Commission has added a new criterion of State's contribution to GDP for horizontal devolution.
The 16th Finance Commission suggests the Centre reduce reliance on cess and surcharge.
This Concept in News
1 topicsFrequently Asked Questions
121. What is the Divisible Pool and its constitutional basis?
The Divisible Pool is the total tax revenue that the Central government shares with the State governments, as mandated by the Constitution of India. Article 270 provides the framework for this distribution.
Exam Tip
Remember that Article 270 is the constitutional basis for the Divisible Pool.
2. What are the key provisions related to the Divisible Pool?
Key provisions include: * The Finance Commission recommends the principles governing the distribution. * Article 270 of the Constitution provides the legal basis. * The pool consists of taxes like personal income tax, corporation tax, CGST, and IGST. * Vertical devolution is the percentage allocated to States (41% recommended by the 15th Finance Commission). * Horizontal devolution is the distribution among States based on criteria like population and income distance.
- •The Finance Commission recommends the principles governing the distribution.
- •Article 270 of the Constitution provides the legal basis.
- •The pool consists of taxes like personal income tax, corporation tax, CGST, and IGST.
- •Vertical devolution is the percentage allocated to States (41% recommended by the 15th Finance Commission).
- •Horizontal devolution is the distribution among States based on criteria like population and income distance.
Exam Tip
Focus on the role of the Finance Commission and Article 270.
3. How has the Divisible Pool evolved over time?
The concept of sharing tax revenue has been present since India's independence. The Constitution formalized the system in 1950 with Article 270. The first Finance Commission was established in 1951 to recommend the principles of devolution. Over time, the percentage of the divisible pool allocated to States has changed based on the recommendations of successive Finance Commissions.
Exam Tip
Note the historical context starting from independence and the role of successive Finance Commissions.
4. What are frequently asked aspects of the Divisible Pool in the UPSC exam?
Questions frequently revolve around the Finance Commission, Centre-State financial relations, and fiscal federalism. Expect factual questions about Article 270 and the recommendations of recent Finance Commissions.
Exam Tip
Prepare well on the Finance Commission's recommendations and their implications.
5. How does the Divisible Pool work in practice?
The Central government collects various taxes, including personal income tax, corporation tax, CGST, and IGST. A portion of these taxes, as determined by the Finance Commission's recommendations and Article 270, is then distributed to the State governments. This distribution aims to ensure States have adequate resources to fulfill their responsibilities.
6. What is the significance of the Divisible Pool in the Indian economy?
The Divisible Pool ensures that States have adequate resources to fulfill their responsibilities, reducing financial imbalances. It is a crucial mechanism for fiscal federalism, promoting balanced regional development and enabling States to invest in essential services like healthcare, education, and infrastructure.
7. What are the challenges in the implementation of the Divisible Pool?
Challenges include disagreements between the Centre and States over the share of the divisible pool, delays in the release of funds, and concerns about the criteria used for horizontal devolution. States often demand a larger share, citing increased responsibilities and developmental needs.
8. What reforms have been suggested for the Divisible Pool?
Suggested reforms include simplifying the tax structure, improving the efficiency of tax collection, and making the criteria for horizontal devolution more transparent and equitable. Some experts suggest giving States more autonomy in raising their own resources.
9. What is the difference between vertical and horizontal devolution in the context of the Divisible Pool?
Vertical devolution refers to the percentage of the divisible pool allocated to all States collectively. Horizontal devolution refers to the distribution of this share among the individual States based on criteria like population, area, and income distance.
10. What taxes are included in the Divisible Pool?
As per the concept, the Divisible Pool primarily consists of taxes like personal income tax, corporation tax, Central Goods and Services Tax (CGST), and Integrated Goods and Services Tax (IGST).
11. What is the role of the Finance Commission in the context of the Divisible Pool?
The Finance Commission, a constitutional body, recommends the principles for the distribution of the Divisible Pool between the Centre and the States. It is constituted every five years.
12. What are the recent developments related to the Divisible Pool?
Recent developments include the submission of reports by the 15th and 16th Finance Commissions for the periods 2021-26 and 2026-31, respectively. States continue to demand a larger share of the divisible pool.