Context:
In the Lok Sabha, Finance Minister Nirmala Sitharaman stated that the Union government is fully complying with the 15th Finance Commission’s recommendation of transferring 41% of the divisible pool of taxes to States.
Key Highlights:
- Parliamentary Statement
- The Finance Minister clarified that the Centre continues to transfer 41% of the divisible pool to States.
- This is in accordance with the 15th Finance Commission’s recommendations for the period 2020–2026.
- Fiscal Transfers to States
- Total resources transferred to States for 2026–27 are estimated at ₹25.44 lakh crore.
- This includes tax devolution and funds under Centrally Sponsored Schemes (CSS).
- Growth in Transfers
- The projected transfers represent:
- ₹2.7 lakh crore increase over 2025–26.
- ₹3.78 lakh crore increase over 2024–25 actual transfers.
- Verification of Devolution
- The Comptroller and Auditor-General (CAG) determines the divisible pool after deducting cess and surcharge from gross tax revenues.
- The 16th Finance Commission confirmed that transfers between 2018–19 and 2022–23 adhered to the 15th FC recommendations.
- Role of Cess and Surcharge
- The Centre is constitutionally empowered to levy cess and surcharge for specific purposes, such as:
- Health programs
- Education initiatives
- Infrastructure and road development
- These funds are not part of the divisible pool but can indirectly benefit States through targeted programs.
Relevant Prelims Points:
- Comptroller and Auditor-General (CAG):
- Constitutional authority under Article 148 responsible for auditing government finances.
- Divisible Pool:
- The portion of central tax revenues shared with States based on Finance Commission recommendations.
- Centrally Sponsored Schemes (CSS):
- Programs funded by the Centre but implemented by States, often requiring shared financing.
Relevant Mains Points:
- Significance of Tax Devolution for States
- Tax devolution forms the largest component of untied funds available to States.
- It enables States to design policies tailored to local developmental needs.
- Federal Fiscal Balance
- Ensuring predictable transfers strengthens cooperative federalism.
- Transparent devolution mechanisms improve trust between the Centre and States.
- Infrastructure and Regional Development
- Central initiatives in infrastructure, logistics, and waterways aim to reduce logistics costs and improve connectivity, especially for hinterland States.
- Way Forward
- Maintain predictability and transparency in fiscal transfers.
- Strengthen cooperative federalism through consultation with States.
- Improve monitoring of fund utilization for better developmental outcomes.
UPSC Relevance:
• GS Paper 2 – Polity: Centre–State fiscal relations.
• GS Paper 3 – Economy: Public finance and tax distribution in India.