In view of the forthcoming festivities and the New Year, the Union government has authorised the release of an additional instalment of tax devolution amounting to Rs 72,961.21 crore to strengthen the hands of state governments for financing various social welfare measures and infrastructure development schemes.

The instalment is in addition to the tax devolution instalment due to states on January 10, 2024 and the instalment of Rs 72,961.21 crore already released on December 11, 2023.

Currently, 41 per cent of taxes collected by the Centre is devolved in 14 instalments among states during a fiscal year.

What is tax devolution?

• Tax devolution is the distribution between the Union and states of the net proceeds of taxes.

• The releases of states’ share (tax devolution) is as per the accepted recommendations of the Finance Commission for its award period.

• One of the core tasks of a Finance Commission as stipulated in Article 280(3)(a) of the Constitution is to make recommendations regarding the distribution between the Union and the states of the net proceeds of taxes from the divisible pool. 

• The divisible pool is that portion of gross tax revenue which is distributed between the Centre and states. The divisible pool consists of all taxes, except surcharges and cess levied for specific purpose, net of collection charges.

• This is the most important task of any Finance Commission, as the share of states in the net proceeds of Union taxes is the predominant channel of resource transfer from the Centre to states.

• The sharing of revenue has provided states with sufficient stability of unconditional revenue to pursue their diverse development objectives.

What is the Finance Commission?

• The Finance Commission is constituted by the President under Article 280 of the Constitution, mainly to give its recommendations on distribution of tax revenues between the Union and the states and among the states themselves.

• The Fifteenth Finance Commission was constituted on November 27, 2017 against the backdrop of the abolition of the Planning Commission (as also of the distinction between Plan and non-Plan expenditure) and the introduction of the Goods and Services Tax (GST), which has fundamentally redefined federal fiscal relations.

• In November 2020, the Fifteenth Finance Commission, led by chairman N.K. Singh, submitted its report for the period 2021-22 to 2025-26 to the then President Ram Nath Kovind. 

• In November 2023, the Union Cabinet cleared the Terms of Reference of the 16th Finance Commission to suggest the ratio for devolution of taxes between the Centre and states and also review financing disaster management initiatives, for five years beginning April 1, 2026.

• The Finance Commission would submit its report for the five-year period (2026-27 to 2030-31) to the President by October 31, 2025.

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