What is tax devolution?

• The Centre released additional instalment of tax devolution to state governments totalling Rs 1,09,019 crore.

• This is in addition to the regular monthly devolution and the second additional instalment this financial year.

• This is the second additional instalment in this financial year.

• This release is in view of the upcoming festive season and to enable states to accelerate capital spending, and also to finance their development/welfare related expenditure.

What is tax devolution?

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

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

• 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.