Finance Commission and the devolution formula
Note
Article 280 requires the President to constitute a Finance Commission every fifth year to recommend how net proceeds of Union taxes are divided between the Union and the States, how that share is distributed among States, and principles governing grants-in-aid under Article 275. Equity criteria such as income distance pull against performance criteria such as demographic change, forest cover, and tax effort, and no weighting satisfies both. Article 281 requires recommendations and action taken to be laid before Parliament; they are advisory but accepted by convention.
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Questions on this topic
Consider the following pairs regarding the constitutional and statutory framework of tax devolution to States in India:
- Finance Commission — Constituted under Article 280 of the Constitution of India to recommend the formula for sharing central taxes with States
- Tax devolution to States — Distribution of a specified share of the divisible pool of central taxes collected by the Union
- Article 275 of the Constitution — Constitutional provision under which the Finance Commission is constituted
Which of the pairs given above is/are correctly matched?
Explanation
Pair 1 is correctly matched: the Finance Commission is a constitutional body established under Article 280 of the Constitution. It is constituted every five years (or earlier) and its core mandate includes recommending the distribution of central taxes between the Union and the States. Pair 2 is correctly matched: tax devolution refers to the transfer of a specified share of the divisible pool of central taxes to the States. The divisible pool comprises most central taxes (excluding cesses and surcharges earmarked for specific purposes), and the Finance Commission recommends the percentage share — currently 41% — to be transferred. Pair 3 is incorrectly matched: Article 275 of the Constitution deals with grants-in-aid from the Consolidated Fund of India to States, not with the constitution of the Finance Commission. Confusing Article 275 (grants-in-aid) with Article 280 (Finance Commission) is a common error; these are two distinct fiscal-federalism instruments — devolution is formula-based and mandatory, while grants-in-aid are discretionary supplements recommended by the Finance Commission for specific needs.
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