Name the taxes that are levied and collected by the Union Government and distributed between the Union and the States in India.

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Points to Remember:

  • Taxes levied and collected by the Union but shared with States.
  • Constitutional basis for tax sharing.
  • Specific taxes included in the divisible pool.
  • Vertical fiscal imbalance and its implications.

Introduction:

India operates a federal system where the Union and State governments share taxing powers. The Constitution of India, specifically Article 265 (prohibition of taxes without authority of law) and Article 270 (assignment of taxes to Union and States), outlines the division of tax revenue. A significant portion of taxes levied and collected by the Union Government is shared with the States to ensure fiscal balance and equitable development across the nation. The precise mechanism and proportion of sharing are determined through the Finance Commission, a constitutional body established every five years. This sharing is crucial for the States’ ability to fund their own developmental projects and welfare schemes.

Body:

1. Taxes Included in the Divisible Pool:

The Union Government levies and collects several taxes, a portion of which is shared with the States. These taxes are primarily included in what is known as the “divisible pool.” Key taxes in this pool include:

  • Income Tax: A significant portion of the income tax collected by the Union is shared with the States.
  • Union Excise Duties: Excise duties on certain goods are also shared. The specific goods and the rates are subject to change based on the Union Budget.
  • Goods and Services Tax (GST): While GST is a shared tax levied by both the Union and States, the compensation cess collected on certain goods is initially collected by the Union and then distributed to the States to compensate for revenue losses during the GST transition. The distribution formula is decided by the GST Council.
  • Customs Duties: A portion of the customs duties collected is also shared with the States.

2. The Role of the Finance Commission:

The Finance Commission plays a pivotal role in determining the share of taxes to be distributed among the Union and the States. It considers various factors, including the States’ population, revenue needs, and developmental priorities. The Commission’s recommendations are binding on the Union Government and are crucial for maintaining fiscal federalism. The 15th Finance Commission, for instance, significantly altered the devolution formula, impacting the fiscal resources available to States.

3. Vertical Fiscal Imbalance:

Despite the tax-sharing arrangement, a vertical fiscal imbalance often persists. This refers to the disparity between the revenue-raising capacity of the Union Government and the States. The Union Government generally has access to more elastic sources of revenue, while States often rely on less elastic sources. This imbalance necessitates the tax-sharing mechanism, but it also leads to ongoing debates about the fairness and adequacy of the distribution formula.

4. Constitutional Provisions and Supreme Court Judgments:

The Constitution provides the legal framework for tax sharing, and Supreme Court judgments have further clarified the interpretation and application of these provisions. Several cases have dealt with disputes related to the distribution of tax revenue, highlighting the importance of a clear and equitable system.

Conclusion:

The Union Government levies and collects several taxes, a significant portion of which is shared with the States. This sharing is crucial for maintaining fiscal balance and promoting equitable development across India. The Finance Commission plays a vital role in determining the distribution formula, considering various factors to ensure fairness and efficiency. However, challenges remain, particularly concerning the persistent vertical fiscal imbalance. To address this, ongoing dialogue and reform are necessary, focusing on strengthening the States’ revenue-raising capacity while ensuring the Union’s ability to meet its national obligations. A robust and transparent tax-sharing mechanism, guided by constitutional principles and informed by expert recommendations, is essential for fostering a strong and equitable federal system that promotes sustainable and holistic development for all citizens.

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