• UGI USER
  • Sep 06, 2024
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ADDRESSING VERTICAL FISCAL IMBALANCE IN INDIA’S FEDERALISM

Why in the news?

The 16th Finance Commission is urged to increase tax devolution to 50%, addressing the vertical fiscal imbalance where States bear higher expenditures but have lower revenue-raising capacity.

source:slideshare

About Vertical Fiscal Imbalance (VFI) in India:

  • VFI arises when States incur more expenditure responsibilities (61%) but have limited revenue-raising powers (38%).
  • This imbalance means that States rely heavily on transfers from the Union government to meet their financial needs.
  • The problem of VFI is addressed by the Finance Commission through tax devolution and grants.
Understanding the Role of the Finance Commission:

  • The Finance Commission’s key task is to recommend how taxes collected by the Union are shared with States.
  • The 15th Finance Commission noted India’s significant VFI, worsened by crises like the COVID-19 pandemic.
  • To correct VFI, the tax devolution to States must be increased from the current 41% to 49%.

Recommendations for the 16th Finance Commission:

  • States are demanding that 50% of net tax proceeds be devolved to address VFI.
  • Increasing devolution will give States more united resources for essential expenditures.
  • Raising tax devolution is crucial for cooperative fiscal federalism, enabling States to address local needs more efficiently.

Associated Article:

https://universalinstitutions.com/union-governments-reins-on-financial-transfers-to-states/