Seven States Are Net Tax Contributors, Highlighting Fiscal Federalism Imbalance
Seven states contribute more to central taxes than they receive in devolutions, highlighting fiscal federalism challenges and the Finance Commission's role.
Photo by Ishant Mishra
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7 states (Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Punjab, Tamil Nadu) contribute more to central taxes than they receive in devolutions
These states are net contributors to the central tax pool
Highlights horizontal imbalance in fiscal federalism
Mentions the role of the 15th Finance Commission
Key Dates
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Visual Insights
India's Net Tax Contributor States (2024 Analysis)
This map highlights the seven Indian states identified as 'net tax contributors' to the central tax pool. These states contribute more in central taxes than they receive back through tax devolutions, illustrating a key aspect of India's redistributive fiscal federalism.
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Exam Angles
Constitutional provisions related to fiscal federalism (Articles 268, 269, 270, 271, 275, 280, 282).
Role and functions of the Finance Commission, including its criteria for devolution.
Concepts of vertical and horizontal fiscal imbalances.
Impact of GST on Centre-State financial relations.
Challenges and debates surrounding fiscal federalism in India, such as 'donor fatigue' and incentivizing growth vs. ensuring equity.
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Summary
An interesting analysis reveals that seven Indian states—Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Punjab, and Tamil Nadu—are 'net contributors' to the central tax pool. This means these states contribute more to the total central taxes collected than they receive back through tax devolutions from the Union government. This situation highlights a key aspect of India's fiscal federalism, where there's often a horizontal imbalance in financial relations between the Centre and states.
The Finance Commission, a constitutional body, plays a crucial role in recommending how taxes should be shared to address both vertical (Centre-State) and horizontal (among states) imbalances. This data, often considered by bodies like the 15th Finance Commission, underscores the redistributive nature of India's federal financial system, aiming to support less developed states while acknowledging the contributions of more economically robust ones.
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Practice Questions (MCQs)
1. Consider the following statements regarding fiscal federalism in India: 1. A 'net tax contributor' state is one that contributes more to the central tax pool than it receives back through tax devolutions. 2. Gujarat, Karnataka, and Tamil Nadu are among the states recently identified as net tax contributors. 3. The concept of 'net tax contribution' primarily addresses vertical fiscal imbalance between the Centre and states. Which of the statements given above is/are correct?
- A.1 and 2 only
- B.2 and 3 only
- C.1 only
- D.1, 2 and 3
Show Answer
Answer: A
Statement 1 is correct as per the definition provided in the news. Statement 2 is correct, as Gujarat, Karnataka, and Tamil Nadu are explicitly mentioned among the seven states. Statement 3 is incorrect. The concept of 'net tax contribution' highlights horizontal fiscal imbalance, which refers to disparities in financial resources and needs among different states, rather than vertical imbalance which is between the Centre and states.
2. Which of the following criteria have been historically considered by the Finance Commissions for horizontal devolution of central taxes to states? 1. Population 2. Area 3. Forest and Ecology 4. Income Distance 5. Tax Effort 6. Demographic Performance Select the correct answer using the code given below:
- A.1, 2, 3 and 4 only
- B.1, 3, 4, 5 and 6 only
- C.1, 2, 3, 4, 5 and 6
- D.2, 4, 5 and 6 only
Show Answer
Answer: C
All the listed criteria—Population, Area, Forest and Ecology, Income Distance, Tax Effort, and Demographic Performance—have been used by various Finance Commissions, particularly the 15th Finance Commission, for determining the horizontal distribution of the divisible pool of central taxes among states. Population (both 1971 and 2011 census), Area, and Income Distance are long-standing criteria. Forest and Ecology, Tax Effort, and Demographic Performance (for states that have controlled population growth) have been introduced or given specific weightage by more recent Finance Commissions to ensure a comprehensive and equitable distribution.
3. In the context of fiscal relations between the Union and States in India, consider the following pairs: 1. Article 270: Taxes levied and collected by the Union but assigned to the States. 2. Article 275: Grants from the Union to certain States. 3. Article 280: Constitution of a Finance Commission. Which of the pairs given above is/are correctly matched?
- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show Answer
Answer: B
Pair 1 is incorrectly matched. Article 270 deals with taxes levied and collected by the Union and distributed between the Union and the States (part of the divisible pool). Taxes levied and collected by the Union but assigned wholly to the States are covered under Article 269. Pair 2 is correctly matched; Article 275 provides for grants from the Union to certain States, particularly grants-in-aid of the revenues of such States. Pair 3 is correctly matched; Article 280 mandates the constitution of a Finance Commission.
4. Which of the following statements best describes the redistributive nature of India's federal financial system?
- A.It ensures that all states receive an equal share of central taxes, irrespective of their economic performance.
- B.It primarily aims to transfer resources from economically weaker states to more developed ones to stimulate growth.
- C.It involves the transfer of resources from economically robust states to less developed states to reduce regional disparities.
- D.It mandates that states contribute to the central pool only in proportion to their per capita income.
Show Answer
Answer: C
Option C accurately describes the redistributive nature. India's fiscal federalism is designed to reduce regional disparities by transferring resources from states with higher revenue-generating capacity (economically robust) to those with lower capacity or greater needs (less developed states). This is done through tax devolution and grants-in-aid recommended by the Finance Commission. Option A is incorrect as shares are not equal but based on various criteria. Option B is the opposite of the redistributive goal. Option D is incorrect as contribution is based on various taxes, not solely per capita income, and the system is not purely proportional.
Source Articles
Seven States contribute more to total taxes than their share in devolutions from the Centre - The Hindu
The Centre’s share in States’ revenue has surged in the last decade - The Hindu
Friction over fiscal federalism: Why do some States get more money from the Centre? - The Hindu
Tax contribution by States needs to be revisited - The Hindu
Are States getting funds they are entitled from the Centre? - The Hindu