Economics • Indian EconomyHard
What principle governs the vertical devolution of tax revenues from the Union government to the states as recommended by successive Finance Commissions?
A. Equal distribution of total tax proceeds among all states regardless of population size
B. Allocating a specified percentage of the divisible pool of taxes to states based on equity, need, and performance criteria✓ Correct Answer
C. Retaining all tax collections at the central level to fund national defense expenditures exclusively
D. Transferring funds only to states that maintain balanced revenue budgets without deficits
💡 Solution & Explanation
Vertical devolution involves transferring a stipulated percentage of the divisible pool of central taxes to state governments, determined by Finance Commission formulas incorporating criteria like population, forest cover, income distance, and demographic performance. Equal distribution ignores developmental disparities across states. Central retention would violate constitutional federal tax-sharing provisions. Fiscal discipline criteria form part of horizontal devolution rather than barring vertical transfers entirely.
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