Evolution of Inter-Se Share of States in Tax Devolution: Who Lost, Who Gained and Why?

In this paper, we undertake an overview of the evolution of the inter-se share of states in the divisible pool of central taxes under the recommendations of Twelfth (FC12) to Fifteenth Finance Commissions (FC15(2)). We group the states into northern, eastern, southern, western, central and hilly states. We look at the profile of shares of these groups in tax devolution and study the pattern of change in their aggregate shares comparing the FC15 (2) shares with FC12 shares. In order to make the shares comparable, the number of states is equalized for FC12 vis-à-vis FC15(2) by redistributing the Jammu and Kashmir shares for the earlier Commissions namely FC12, FC13 and FC14 when Jammu and Kashmir was a state. It is shown that the southern, northern and eastern states were net losers while the hilly, western and central states were net gainers. Maximum loss has been to the southern states due to the distance criteria and maximum gain to the hilly states due to area disabilities. Changes in shares were normalized for the size of population by calculating group-wise shares per 1% of population. For the southern states, two criteria contributed to reduction in relative shares, namely, distance and fiscal effort, and the magnitude of their loss under these two could not be made up by the gain in the remaining two groups of criteria, namely, area disabilities and population-related criteria. We also consider changes in the devolution framework that would lead to the minimization of the loss for southern states using FC15(2) data.