16th Finance Commission: Revamping Tax Pool Distribution

  Nov 03, 2023

16th Finance Commission

1. What will the 16th finance commission focus on?

The commission’s main focus will be to determine how much of the tax pool the Central government shares with states and how this pool should be apportioned among states.

2. What is the current scenario with state shares?

Currently, the Centre gives away 41 paise to states for every rupee of the tax pool. States argue that being closer to the people, they can use funds more efficiently. There’s a concern about the Centre’s inability to spend on national security and defense.

3. What is the “horizontal sharing” of the divisible pool?

It refers to the distribution of the tax pool among states. Richer states contribute more but get back less. For instance, states like Tamil Nadu and Maharashtra contribute more but receive less than states like Bihar and Jharkhand.

4. Why is there cross-subsidization of poorer states?

Cross-subsidization ensures that poorer states are financially supported by richer states. This principle of redistribution has been accepted, but the extent and methodology are debated.

5. What are the concerns regarding North-South financial division?

There’s an ongoing debate about the funds distribution between Northern and Southern states. Concerns arise from factors like demographic shifts, economic growth, and private investment, among others.

6. How does the reduction in Parliament seats impact richer states?

Richer states might face a double blow of reduced political clout combined with an enhanced commitment to cross-subsidization.

7. What role does the Fiscal Responsibility and Budget Management (FRBM) Act play in this scenario?

The FRBM Act ensures fiscal sustainability by recommending the establishment of a fiscal council, which provides a multi-year fiscal projection, analysis, and compliance with fiscal rules.

8. How is the finance commission looking to address these concerns?

The commission seeks enlightened leadership at both central and state levels to navigate these challenges and look beyond politics to find a balanced resolution.

Understanding the fiscal relationship between the Centre and states is vital for informed decision-making in the country.



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