Consider the following: 1. Demographic performance 2. Forest and ecology 3. Governance reforms 4. Stable government 5. Tax and fiscal efforts For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?
Contents8
- AOnly two
- BOnly three
- COnly four
- DAll five
Show answer
Answer: (B) Only three
The 15th Finance Commission uses these criteria for horizontal devolution:
- Population (15%)
- Area (15%)
- Forest & Ecology (10%)
- Income Distance (45%)
- Tax & Fiscal Efforts (2.5%)
- Demographic Performance (12.5%).
From the given list, items
- Demographic performance
- Forest and ecology
- Tax effort
are used.
'Stable government' and 'Incidence of poverty' are NOT criteria.
Only three are correct.
Answer is (b).
The 15th Finance Commission determines how over ₹8 lakh crore in central taxes gets distributed among states every year through horizontal devolution criteria.
The 15th Finance Commission introduced new criteria like demographic performance (rewarding states with lower fertility rates) and increased weightage for forest cover, shifting from earlier commission patterns.
Students must memorize the exact six criteria and their weights: Population (15%), Area (15%), Income Distance (45%), Forest & Ecology (10%), Demographic Performance (12.5%), and Tax & Fiscal Efforts (2.5%).
15th Finance Commission Tax Devolution Criteria
Indian Economy Demographic performance Forest and ecology Tax and fiscal efforts horizontal tax devolution Fifteenth Finance Commission
15th Finance Commission: Horizontal Tax Devolution Criteria & Weightages
15th Finance Commission uses 6 criteria for horizontal tax devolution with specific weightages
Population (15%) and Income Distance (45%) carry the highest weights
Stable government and governance reforms are NOT devolution criteria
Forest & Ecology (10%) was newly introduced to reward conservation efforts
The 15th Finance Commission (2021-26) determines how tax revenue is shared between the Centre and States, then among States themselves (horizontal devolution). Unlike previous commissions, it introduced environmental criteria and adjusted population weightages to balance equity and efficiency.
Six Devolution Criteria
Criteria | Weightage | What It Measures | Why Included |
|---|---|---|---|
Income Distance | 45% | Gap between State's per capita income and highest State | Equity - helps poorer States |
Population | 15% | State's share in total population | Basic needs allocation |
Area | 15% | Geographic size of State | Administrative costs, infrastructure needs |
Demographic Performance | 12.5% | Decline in fertility rate (1971-2011) | Rewards States that controlled population |
Forest & Ecology | 10% | Forest cover as % of geographic area | Environmental conservation incentive |
Tax & Fiscal Efforts | 2.5% | State's tax collection efficiency | Encourages revenue mobilization |
From the question's list, only 3 items match actual criteria: Demographic performance, Forest and ecology, and Tax and fiscal efforts. Stable government and Governance reforms are policy goals but not Finance Commission devolution criteria.
Trap: Stable government sounds like a legitimate criterion but is NOT used by Finance Commission
Trap: Governance reforms is confused with actual administrative criteria - it's a policy outcome, not a devolution factor
Trap: Students may count all 5 items thinking Finance Commission considers governance quality
Trap: Income Distance has the highest weightage (45%) - not population as many assume
Finance Commission: Evolution & Mandate
Indian Economy Finance Commission
Finance Commission: Constitutional Role & Historical Evolution
Article 280 mandates Finance Commission appointment every 5 years
Recommends vertical devolution (Centre-State share) and horizontal devolution (among States)
15th FC increased States' share from 42% to 41% due to J&K reorganization
Finance Commissions are constitutional bodies under Article 280 that recommend tax sharing between Centre and States. Each commission serves for 5 years and adapts criteria based on changing national priorities and fiscal challenges.
Key Changes Across Commissions
Commission | Period | States' Share | Major Innovation | Key Criteria Change |
|---|---|---|---|---|
13th FC | 2010-15 | 32% | Performance-based grants | Added governance quality factors |
14th FC | 2015-20 | 42% | Massive devolution increase | Simplified to 4 criteria only |
15th FC | 2021-26 | 41% | Environmental criteria added | Forest & Ecology (10%) introduced |
Finance Commission Functions
# Finance Commission
## Tax Devolution
- Vertical sharing ratio
- Horizontal distribution criteria
- Performance incentives
## Grants
- Revenue deficit grants
- Disaster relief
- Local bodies grants
- Specific purpose grants
## Other Functions
- Debt consolidation
- Fiscal discipline roadmap
- State-specific recommendationsCentre-State Fiscal Relations Framework
Indian Economy
Centre-State Fiscal Relations: Constitutional Framework & Modern Challenges
Fiscal federalism balances Centre's revenue powers with States' expenditure responsibilities
GST Council has created new cooperative federalism model for indirect taxes
Revenue deficit affects 17 States requiring Finance Commission grants
India's fiscal federal structure creates vertical imbalance - the Centre collects most taxes but States handle most expenditures (education, health, agriculture). This necessitates systematic tax sharing and grants through constitutional mechanisms.
Revenue Sources Distribution
Tax Type | Collection Authority | Sharing Mechanism | States' Effective Share |
|---|---|---|---|
Income Tax | Centre | Finance Commission devolution | ~41% of net proceeds |
Corporate Tax | Centre | Finance Commission devolution | ~41% of net proceeds |
GST | Both | GST Council formula | ~50% (varies by type) |
Property Tax | States/Local | Fully retained | 100% |
Excise (petroleum) | Centre | Not shared | 0% (outside GST) |
Tax Devolution Process
%%{init: {"flowchart": {"wrappingWidth": 460}}}%%
flowchart TD
s1["`**Centre collects divisible taxes**
Income tax, corporate tax, GST Centre's share`"]
s2["`**Finance Commission sets sharing ratio**
Currently **41%** to States collectively`"]
s3["`**Horizontal distribution among States**
Using 6 criteria with specific weightages`"]
s4["`**Additional grants if needed**
Revenue deficit, disaster relief, local bodies`"]
s1 --> s2
s2 --> s3
s3 --> s4Trap: GST sharing is NOT through Finance Commission - it follows GST Council decisions
Trap: Petroleum products remain outside GST, so States don't share Centre's excise revenue
Trap: 41% is the current devolution ratio - previous questions may use outdated 32% or 42%