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Research Paper | Finance | India | Volume 12 Issue 5, May 2023 | Rating: 3.8 / 10

A Critical Analysis of Finance Commission Formulas Since 2000-01

Khushboo Gupta

Abstract: Like other federations worldwide, India too faces the problem of fiscal imbalances. Most broad based taxes are assigned to the centre whereas states are responsible for most major expenditure. This gives rise to Vertical fiscal imbalance. On the other hand, developmental differences between the states gives rise to horizontal imbalance. The Finance Commission, established in 1951 based on Article 280, plays a key role in intergovernmental transfers. Its primary function is to recommend how the central government should share tax revenue with the states. This ensures that all states have the financial means to provide a comparable standard of public services to their citizens, regardless of their own revenue generation capacity. The funds received by the states are to be divided between the states on the basis of the formula/ criteria. These criteria have been changing over the time keeping the role of various factors into consideration, population, area, income distance, tax effort and fiscal discipline being the major ones.

Keywords: Fiscal Imbalance, Finance Commission, Tax Devolution, Tax Effort. Fiscal Discipline

Edition: Volume 12 Issue 5, May 2023,

Pages: 2675 - 2680