Which one of the following taxes is not included in the Central Pool to be shared with the States according to the recommendations of Finance Commission of India?
- (a)Personal Income Tax
- (b)Corporate Profit Tax
- (c)Surcharge and Cess
- (d)Excise Duties
Correct — C, Surcharge and Cess. Article 270 of the Constitution puts all Union taxes and duties into a common pool to be shared with the States on the Finance Commission's recommendation, but it expressly leaves out surcharges and cesses; Article 271 lets Parliament add a surcharge on any Union tax for the purposes of the Union alone, and the proceeds go wholly to the Centre. That is why a cess such as the Health and Education Cess, or a surcharge on high incomes, does not enter the divisible pool at all, while personal income tax, corporation tax and Union excise duties do. It is also why the share of gross Union tax revenue that States actually receive is smaller than the headline devolution percentage recommended by the Finance Commission, and why the rising weight of cesses and surcharges has been a standing complaint of the States before successive Commissions.
- (a)Personal Income Tax — Income tax other than agricultural income is a Union tax that forms part of the divisible pool under Article 270.
- (b)Corporate Profit Tax — Corporation tax is in the pool today. It was excluded before the Eightieth Amendment of 2000, which pooled all Union taxes together; that history is what makes it a tempting pick.
- (d)Excise Duties — Union excise duties are shareable. Only the part collected as a cess — such as the road and infrastructure cess on fuel — stays outside the pool.
The Finance Commission is appointed under Article 280 every five years to recommend how the net proceeds of Union taxes should be divided between the Centre and the States, how they should be distributed among the States, and what grants-in-aid should be paid. Article 270 defines the divisible pool as all Union taxes and duties except the surcharges and cesses levied for the purposes of the Union under Article 271 and duties or taxes referred to in Articles 268 and 269. The Fifteenth Finance Commission recommended a States' share of 41 per cent for its award period.
The four options are three genuine Union taxes and one category that is deliberately kept outside the sharing arrangement. The way in is to ask what a cess is for: a cess is earmarked for a stated purpose and a surcharge is a tax on a tax for the Union's own use, so neither is 'net proceeds' available for sharing. This is also the live policy argument — because cesses and surcharges are outside the pool, raising revenue through them rather than through base rates lowers what the States get without changing the headline devolution figure.
- Article 270 creates the divisible pool and excludes surcharges and cesses from it; Article 271 authorises a surcharge for the purposes of the Union alone.
- The Eightieth Amendment, 2000, pooled all Union taxes together, so corporation tax became shareable.
- The Fourteenth Finance Commission raised the States' share from 32 to 42 per cent; the Fifteenth recommended 41 per cent after Jammu and Kashmir became a Union Territory.
- The Finance Commission is constituted under Article 280 every fifth year or earlier, and its recommendations are laid before Parliament with an explanatory memorandum.
- Assuming corporation tax is still outside the pool — that ended with the Eightieth Amendment in 2000.
- Confusing the Finance Commission with the erstwhile Planning Commission's plan transfers.
- Treating the recommended devolution percentage as the share of all Union revenue the States receive.
As a which-one-is-excluded item on the divisible pool, or as statements on Finance Commission recommendations and devolution percentages.
With reference to the Fourteenth Finance Commission, which of the following statements is/are correct? 1. It has increased the share of States in the central divisible pool from 32 percent to 42 percent. 2. It has made recommendations concerning sector-specific grants. Select the correct answer using the code given below.
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer(a) 1 only
The same divisible pool, seen from the devolution side. What the Fourteenth Commission raised to 42 per cent is a share of exactly the pool this question asks you to define, which is why what falls outside it matters so much to the States.
- practice — not a real PYQ
Under which Article of the Constitution may Parliament levy a surcharge on Union taxes for the purposes of the Union alone?
- (a)Article 268
- (b)Article 269
- (c)Article 270
- (d)Article 271
Answer(d) Article 271 — a surcharge levied under it goes wholly to the Centre and is not part of the divisible pool defined in Article 270.
- practice — not a real PYQ
The Finance Commission of India is constituted under which Article?
- (a)Article 263
- (b)Article 275
- (c)Article 280
- (d)Article 293
Answer(c) Article 280 — the President constitutes it every fifth year or earlier to recommend tax devolution and grants-in-aid.