Central Idea:

The article advocates for the inclusion of tax contribution, particularly from Goods and Services Tax (GST) and petroleum consumption, as a significant efficiency indicator in the distribution formula used by Finance Commissions to allocate Union tax revenue among states. The authors argue that these measures provide a fair and stable representation of a state’s economic contribution to the national exchequer.

Key Highlights:

• Finance Commissions play a crucial role in recommending the distribution of Union tax revenues among states.
• Historically, tax contribution had less weight in the distribution formula, but it was completely dropped since the 10th Finance Commission.
• The article contends that tax contribution, especially under the GST regime, is a reliable measure of efficiency, unlike other indicators like tax effort and fiscal discipline.
• The authors propose that GST and petroleum consumption, being stable and indicative of income, should be given a substantial weight in the distribution formula.

Key Challenges:

• Resistance from states that may perceive a potential shift in their shares based on tax contribution.
• The stability of indicators like tax effort and fiscal discipline is questioned, making it challenging to assign them higher weights.
• The need to ensure that the inclusion of tax contribution does not lead to unfair outcomes or discourage states from adopting progressive tax policies.

Key Terms:

• Goods and Services Tax (GST): A unified consumption-based destination tax equally divided between the State and Central governments.
• Tax Contribution: The amount of revenue generated by a state through taxes, considered as an efficiency indicator.
• Finance Commission: A body responsible for recommending the distribution of Union tax revenues among states in India.

Key Phrases:

• “Equity and efficiency in tax revenue transfers.”
• “Tax contribution as an efficiency indicator.”
• “GST and petroleum consumption as fair measures of states’ contributions to the national exchequer.”

Key Quotes:

• “Tax contribution is an efficiency indicator because a State’s level of development and economic structure decides its tax contribution.”
• “GST satisfies the criterion of stability in tax structure, making it an ideal efficiency indicator.”
• “There is a persuasive case for the 16th Finance Commission to debate and include these ratios as a measure of efficiency.”

Key Statements:

• “Since the 10th Finance Commission, tax contribution was dropped from the distribution formula.”
• “GST is a consumption-based destination tax that is equally divided between the State and Central governments.”
• “The Finance Commissions have always favored assigning more than 75% weight to equity indicators.”

Key Examples and References:

• The article references the 15th Finance Commission’s distribution formula, which included tax effort, fiscal discipline, and demographic performance.
• The stability of GST as an efficiency indicator is supported by calculations presented by the authors.

Key Facts:

• The share of personal and corporate income taxes is 64% in Central tax revenue in 2021-22.
• Finance Commissions historically assigned 10% to 20% weight to tax contribution in the distribution formula.

Key Data:

• The weightage of tax effort in the 15th Finance Commission’s distribution formula was 2.5%, with demographic performance receiving a weight of 12.5%.
• The recommended weight for equity indicators in the same formula was 85%.

Critical Analysis:

The article provides a compelling argument for the inclusion of tax contribution in the distribution formula, highlighting the stability and fairness of GST as an efficiency indicator. However, potential challenges such as resistance from states and the need for careful consideration to prevent unintended consequences are acknowledged.

Way Forward:

The authors suggest that the 16th Finance Commission should actively debate and consider including GST and petroleum consumption with a substantial weight in the distribution formula. This, they argue, would better represent states’ contributions to the national exchequer and promote efficiency in resource allocation.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now