What are Horizontal and Vertical Tax Devolution?
By Balaji
Updated on: February 17th, 2023
According to Article 280 of the Constitution, each Finance Commission must make recommendations for the horizontal and vertical devolution of the Union’s net tax revenues to the states and the federal government. According to the constitutional arrangement and current requirements, the Finance Commission, a constitutional body, chooses the method and formula for dividing tax revenue between the Center and the States and between the States.
Table of content
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1. Horizontal and Vertical Tax Devolution
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2. What are Horizontal and Vertical Tax Devolution?
Horizontal and Vertical Tax Devolution
According to the Constitution, the FC has broad powers to (re)define financial relations between the Union and the states. The President of India constituted the 15th Finance Commission in November 2017 under the chairmanship of NK Singh. Its recommendations will cover five years, from 2021-22 to 2025-26.
Vertical transfer (transfer of Union taxes to states)
In line with its interim report for 2020–2021, it suggested maintaining vertical transmission at 41%. It corresponds to 42% of the distributable pool suggested by the 14th Finance Commission.
The former State of Jammu and Kashmir’s status as the new Ladakh, Jammu, and Kashmir Union Territories necessitated an adjustment of about 1%.
Horizontal transfer (distribution between countries)
For horizontal transfer, it suggested 12.5% weightage on demographic performance, 45% on income, 15% on population and area, 10% on forests and ecology, and 2.5% on taxes and fiscal effort.
Summary:
What are Horizontal and Vertical Tax Devolution?
The Constitution requires that each FC submit proposals for the division of net tax income, commonly known as vertical and horizontal devolution, between the Union and the states and among the states. Vertical transfer deals with union taxes transfers between the states, while horizontal deals with distributions between the countries.
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