|Topic: GS3 – Indian Economy – Issues relating to mobilization of resources.
Relevant for UPSC as it explores the evolution of Finance Commission formulas, proposing the inclusion of GST and petroleum consumption for efficiency.
- The Finance Commission recommends distribution formulas for State shares in Union tax revenue.
- States argue for higher shares based on their perceived higher contributions to Union tax revenue.
- Till the 10th Finance Commission, tax contribution had limited weight in distribution formulas.
- Post the 10th Finance Commission, tax contribution was excluded, and population became a dominant factor.
- Shift towards incorporating equity indicators with more than 75% weight since the 10th Finance Commission.
- Post-2000, distribution formulas included tax effort and fiscal discipline as efficiency indicators.
- States advocate for increased weightage for efficiency indicators in distribution formulas.
- GST, being a consumption-based destination tax, provides stability and accurate estimation of tax contribution by States.
- Proposal to include GST contribution as an efficiency indicator due to its uniform structure and stability.
- Petroleum consumption, outside GST, is suggested as another indicator of tax contribution.
- Relative shares of petroleum consumption stable over time, reflecting the State’s contribution to Union excise duties.
- Relative GST contribution and petroleum consumption reflect differences in incomes, both personal and corporate.
- Proposal for the 16th Finance Commission to consider these ratios with a suggested weightage of at least 33%.
- Inclusion of GST and petroleum consumption in the distribution formula deemed essential for fairness and accuracy.
- These measures are seen as representative of States’ contributions to the national exchequer and indicators of efficiency.
|PYQ: How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss. (250 words/15m) (UPSC CSE (M) GS-2 2018)
|Practice Question: Discuss the evolution of Finance Commission distribution formulas in India and evaluate the proposal to include GST and petroleum consumption as efficiency indicators. (150 words/10 m)