The principles governing the sharing of income tax revenue between the Union government and the state governments in India are outlined in the Constitution and various Finance Commission recommendations. Here are the key principles:
Constitutional Provisions
Article 270
This article provides for the distribution of income tax proceeds between the Union and the states. It states that all taxes and duties collected by the Union in the name of income tax shall be distributed among the states in accordance with the principles laid down by Parliament.
Article 272
This article empowers the Parliament to create grants-in-aid for the states out of the proceeds of income tax or any other tax.
Finance Commission Recommendations
The Finance Commission
The Finance Commission is a constitutional body established under Article 280 of the Constitution. Its primary function is to make recommendations on the distribution of tax resources between the Union and the states.
Determining Factors
The Finance Commission takes into consideration several factors while making its recommendations, including the needs of the states, resources available to the Union, population, income disparities, fiscal capacity, and other relevant factors.
Devolution of Taxes
The Finance Commission recommends the percentage of the divisible pool of taxes that should be allocated to the states. This includes the share of income tax, which is an important component of the divisible pool.
Vertical Devolution
The Finance Commission also determines the vertical devolution, which is the share of taxes assigned to the states. It specifies the percentage of the total income tax revenue that should be allocated to the states.
Grants-in-Aid
The Finance Commission may recommend grants-in-aid to states from the proceeds of income tax or any other tax. These grants are provided to address specific needs, imbalances, or to promote the welfare of certain regions or communities.
Balanced Distribution
The principles governing the share of income tax aim to achieve a balanced distribution of tax resources between the Union and the states. These principles take into account factors such as population, fiscal capacity, development needs, and socio-economic disparities to ensure a fair and equitable sharing of revenue.
