Evaluate the innovativeness of the Fifteenth Finance Commission on Centre-State relations regarding the…

Question

Evaluate the innovativeness of the Fifteenth Finance Commission on Centre-State relations regarding the sharing of tax revenues.

Ghissu Editorial · Accepted Answer

The Fifteenth Finance Commission innovated by adding forest and ecology (10%), demographic performance (12.5%) and tax effort (2.5%) to devolution criteria, setting the states' share at 41% for the new UTs. Its impact on Centre-State relations is partial, as rising cesses and surcharges outside the divisible pool shrink actual transfers.

**Introduction**

The Fifteenth Finance Commission⟦2⟧⟦1⟧ (FFC), for 2021-26, innovated Centre-State tax revenue sharing amid GST reforms and new Union Territories, aiming to balance equity, efficiency, and fiscal discipline. It responded to evolving fiscal federalism challenges, including rising cess revenues shrinking the divisible pool and changing political geography.

**Innovative Features**

1. **Broadened Devolution Criteria**: FFC added forest and ecology (10%) and demographic performance (12.5%) to traditional factors like income distance (45%) and population (15%), incentivizing environmental and demographic priorities, benefiting states like ==Telangana’s agency tracts with tribal populations and forest areas==.

2. **Inclusion of Tax Effort and Targeted Grants⟦3⟧**: A small weight (2.5%) was given to tax effort to encourage states’ revenue mobilization. Additionally, substantial grants-in-aid were recommended, including Rs 2.94 lakh crore for revenue deficit states and Rs 1.29 lakh crore for sectoral needs like health and education, blending devolution with targeted support.

**Impact on Centre-State Relations**

3. **Shrinking Divisible Pool**: Rising cesses and surcharges excluded from the divisible pool reduced states’ effective share from the nominal 41%, limiting FFC’s devolution impact, since these levies are not shared with states.

**Effectiveness and Implications**

4. **Partial Vertical Imbalance Addressed**: Targeted grants and maintaining a 41% share have helped address vertical fiscal imbalance, but the growing share of non-divisible cesses limits actual resources available to states.

**Conclusion**

FFC’s approach is innovative in broadening devolution criteria and balancing new fiscal realities but remains constrained by shrinking divisible pools and political tensions among states.

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