Central Transfers to States: Role of the Finance Commission
Distilled Policy Brief
- The Finance Commission is a constitutional body formed every five years to give recommendations on centre-state financial relations, including central tax sharing, grants distribution, and supplementing local body finances.
- Tax devolved to states consists of untied funds giving states spending discretion, constituting over 80% of total central transfers, with the 14th Finance Commission increasing tax devolution from 32% to 42%.
- Following a Constitution amendment in 2000 that allowed all central taxes to be shared with states, the 15th Finance Commission was mandated to use data from the 2011 Census for recommending transfers.
🎯 Prelims High-Yield Examination Points
Understand Article 280, the difference between untied tax devolution and tied grants-in-aid, and the evolution of shareable tax pools post-2000 constitutional amendment.
⚖️ Mains Analytical & Syllabus Linkages
Analyze how criteria used by Finance Commissions balance fiscal equity and economic efficiency while addressing vertical and horizontal fiscal imbalances.
🎯 UPSC Prelims Practice Drill
With reference to the Finance Commission and central fiscal transfers in India, consider the following statements: 1. Central tax devolved to states consists of untied funds, granting states full spending discretion. 2. The 14th Finance Commission increased the share of tax devolution to states from 32% to 42%. 3. The 15th Finance Commission was mandated to use population data from the 2011 Census for recommending tax transfers. Which of the statements given above are correct?
- [A] 1 and 2 only
- [B] 2 and 3 only
- [C] 1 and 3 only
- [D] 1, 2 and 3
▶ Reveal Official Answer & Analytical Explanation
Statement 1 is correct as tax devolved from the central pool constitutes untied funds with spending discretion for states. Statement 2 is correct because the 14th Finance Commission raised the devolution percentage from 32% to 42%. Statement 3 is correct because the terms of reference for the 15th Finance Commission explicitly mandated using 2011 Census data for recommending fiscal transfers.
🏛️ Historical Twin PYQ Anchor (2021)
Consider the following statements regarding the "National Clean Air Programme (NCAP)": 1. It is implemented by the Ministry of Environment, Forest and Climate Change. 2. Central Pollution Control Board acts as the sole regulatory executive body.