In the context of Indian fiscal federalism, Vertical

Solution

The Finance Commission of India is established under Article 280 of the Constitution. It makes recommendations on the distribution of the net proceeds of taxes between the Union and the States. It also covers allocation between the States of the respective shares of such proceeds, grants-in-aid to States , review arrangements on financing Disaster Management initiatives, etc. Vertical devolution is the structural division of the net proceeds of central taxes between the Union (Centre) and the States. It ensures that the States have a constitutional claim to a portion of the tax revenue collected by the Centre to meet their developmental expenditures. Horizontal devolution is the mechanism used to distribute the total states’ share of central taxes among individual states, aiming to reduce regional fiscal disparities. It determines the percentage of funds each state receives based on specific criteria like population, income gap, area, forest cover, and fiscal performance, etc.    The 16^th Finance commission: ·        The 16^th Commission is currently chaired by Dr Arvind Panagariya. ·        It covers a period of five years commencing on the 1^st April, 2026 to 31^st March 2031. ·        Vertical devolution - The 16th Finance Commission recommended keeping the vertical share at 41%, which is a continuation of the rate established by the 15th Finance Commission. ·        Horizontal devolution - The formula now includes a new parameter: a state's GDP contribution, with a weightage of 10%, to recognize state efficiency and contribution to the country's GDP. Further, 2.5% weight for states’ tax efforts has been removed, and there is increase in the population share by 2.5 percentage points. There is also decrease in the weight of area, demographic performance, and per capita GSDP distance.