Uttar Pradesh's Fiscal Share: High Devolution Despite Lower Tax Contribution
Uttar Pradesh received 15.8% of the central tax kitty despite contributing only 4.6%, highlighting the principles of fiscal federalism and the Finance Commission's role in redistribution.
Photo by Sourabh Pandey
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Uttar Pradesh contributed 4.6% to central tax kitty
Uttar Pradesh received 15.8% of central tax kitty
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Uttar Pradesh's Significance in India's Fiscal Devolution
This map highlights Uttar Pradesh, India's most populous state, to contextualize its large share in central tax devolution. Its significant population and area are key factors in the Finance Commission's criteria for resource distribution.
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Exam Angles
Role and functions of the Finance Commission (Article 280)
Criteria for tax devolution used by various Finance Commissions (especially 15th FC)
Concepts of vertical and horizontal fiscal imbalances
Challenges to fiscal federalism (e.g., cesses and surcharges, states' fiscal autonomy)
Impact of GST on central-state financial relations
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Summary
A recent report highlighted that Uttar Pradesh, India's most populous state, contributed 4.6% to the central tax pool but received a significantly larger share of 15.8% from the divisible pool of taxes. What does this mean? Essentially, the central government collects taxes, and a portion of these taxes is then shared with states based on recommendations from the Finance Commission. This redistribution mechanism is a cornerstone of India's fiscal federalism, aiming to reduce regional disparities and ensure that states with lower revenue-generating capacity but higher development needs receive adequate funds.
Uttar Pradesh's higher share reflects criteria like population, area, and income distance, which are used to determine devolution, rather than just tax contribution. This ensures that all states, especially those with larger populations and developmental challenges, have the resources to fund public services and development projects.
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Practice Questions (MCQs)
1. Consider the following statements regarding the devolution of taxes in India: 1. Uttar Pradesh receives a significantly larger share from the divisible pool of taxes compared to its contribution to the central tax pool. 2. The Finance Commission's recommendations for tax devolution are primarily based on a state's tax collection efficiency. 3. Criteria such as population, area, and income distance are considered by the Finance Commission to determine the share of states in the divisible pool. Which of the statements given above is/are correct?
- A.1 and 2 only
- B.1 and 3 only
- C.2 and 3 only
- D.1, 2 and 3
Show Answer
Answer: B
Statement 1 is correct as per the news article, highlighting the redistributive nature of fiscal federalism. Statement 2 is incorrect; while 'tax effort' can be a criterion, the devolution is not *primarily* based on tax collection efficiency. It's a mix of needs and performance, with needs often taking precedence for equity. Statement 3 is correct; population, area, and income distance are key criteria used by Finance Commissions to determine horizontal devolution, as mentioned in the article.
2. In the context of the recommendations of the Finance Commission regarding the devolution of taxes to states, which of the following statements is/are correct? 1. The 15th Finance Commission introduced 'demographic performance' as a criterion to reward states that have successfully controlled their population growth. 2. Income distance, reflecting the gap between a state's per capita income and that of the highest per capita income state, is a criterion used to address horizontal fiscal imbalances. 3. Forest and ecology, representing the green cover within a state, has consistently been given the highest weightage among all devolution criteria across all Finance Commissions.
- A.1 only
- B.2 only
- C.1 and 2 only
- D.1, 2 and 3
Show Answer
Answer: C
Statement 1 is correct. The 15th Finance Commission indeed introduced 'demographic performance' (using 2011 population data and a demographic performance index) as a criterion, which was a significant change and aimed at incentivizing population control. Statement 2 is correct. Income distance is a standard and crucial criterion used by Finance Commissions to measure the gap in per capita income between states and the highest per capita income state, thereby addressing horizontal fiscal imbalances. Statement 3 is incorrect. While 'forest and ecology' is a criterion, it has not consistently been given the highest weightage. Criteria like income distance and population usually carry higher weightage.
3. Which of the following taxes or levies is NOT typically part of the 'divisible pool' of central taxes shared with states as per the recommendations of the Finance Commission?
- A.Corporation Tax
- B.Income Tax
- C.Union Excise Duties (post-GST, on non-GST items like petroleum)
- D.Cesses and Surcharges levied by the Union government
Show Answer
Answer: D
Cesses and Surcharges levied by the Union government are typically not part of the divisible pool of taxes. They are collected by the Centre for specific purposes and are retained solely by the Union government, which has been a point of contention in Centre-State fiscal relations. Corporation Tax, Income Tax, and Union Excise Duties (on items not covered by GST, like petroleum products and alcohol for human consumption) are generally part of the divisible pool.
4. Consider the following statements regarding the Finance Commission in India: 1. Article 280 of the Constitution of India provides for the establishment of a Finance Commission every five years or at such earlier time as the President deems necessary. 2. The recommendations of the Finance Commission regarding the distribution of net proceeds of taxes between the Union and the States are binding on the Union government. 3. A member of the Finance Commission must necessarily be a judge of a High Court or qualified to be appointed as one. Which of the statements given above is/are correct?
- A.1 only
- B.1 and 2 only
- C.2 and 3 only
- D.1, 2 and 3
Show Answer
Answer: A
Statement 1 is correct. Article 280 mandates the President to constitute a Finance Commission every five years or earlier. Statement 2 is incorrect. The recommendations of the Finance Commission are advisory in nature, not binding on the Union government, although they are usually accepted by convention. Statement 3 is incorrect. The qualifications for members of the Finance Commission are specified by Parliament (Finance Commission (Miscellaneous Provisions) Act, 1951). They typically include expertise in public affairs, economics, finance, and administration, but there is no mandatory requirement for a member to be a judge of a High Court or qualified to be one. This qualification is sometimes associated with the Chairman of the Law Commission, not a general member of the Finance Commission.