Taxation in Germany and Switzerland – Comparitive Study

Authored By: Shreyas B. T

We have seen in the previous posts on how taxes are collected in India by the three levels of government, the Center collecting the vast majority of the taxes and mechanisms (with the specifics of the latest/ 14th FC’s recommendations) of the Center sharing part of those taxes with the States and most importantly the lacunae in the very principles and formulae around it.

 Let’s now see what and how is it done in some of the European Federal Democracies:

Germany: Germany’s constitution (which is called The Basic Law), divides the authority predominantly between the Federal (Center) and the Lander (State) governments. Just like the Indian Constitution, Germany’s Basic Law also clearly defines which layer of the government collects which tax.

The table below provides a view of some of the most important German taxes and their collection authorities. VAT and Income Tax are the largest by far, and it can be clearly seen that those are called and treated as “Shared” revenues.

Taxation Powers in Germany
Federal Energy, Insurance Tax, Tobacco
Landers (States) Inheritance Tax, Transactions Taxes (Real Property Transfer Tax)
Local Authorities Real Property Tax, Trade Tax, Local Excise Tax
Shared Income Tax, Corporate Tax, VAT, Solidarity Surcharge

These taxes are then shared with the other layers of governments to carry out public spending to deliver policies falling in areas of their respective responsibilities. A high-level split of the shared taxes between the Federal, Lander (State) and Local Authority buckets are:

Vertical Distribution
  VAT Income Tax Corporate Tax
Federal 52.00% 42.50% 50.00%
Lander (State) 45.50% 42.50% 50.00%
Local Authority 2.50% 15.00%

 A key factor to note here is that every Lander (State) eventually receives 42.5% of Income Tax revenues that are collected for the income of its inhabitants (income earned from either inside or outside of its territory). Likewise, even the Corporate Tax is distributed to the Landers (States) where the corporate operates based on the respective share of the wages in the total.

Such arrangements ensure a rightful share of the Income Tax and Corporation Tax reach the Landers and fairly compensate the Landers for the resources it would have spent on providing the living conditions for the people; and an operational ecosystem and infrastructure for the corporates.

 The Landers’ share of VAT however follows a rather uncreative arrangement (like in the Indian context, where more populous yet poorer States eat into the less populous yet financially disciplined States’ contribution) – where a State’s population gets an approximate weight of 75% and the rest 25% weight is earmarked for the financial “backwardness” of the States having lower than the per capita average of all States.

 There are a few more Financial Equalisation arrangements applied (like the Supplementary Federal Grants from the Federal’s kitty) to ensure harmonization to provide a near equal living conditions across the country.

Impact of Financial Equalisation and Supplementary Federal Grants

Financial Equalisation


Financial Equalisation

After Financial Equalisation


Supplementary Federal Grants

70.00% 91.00% 97.50%
80.00% 93.50% 98.00%
90.00% 96.00% 98.50%
100.00% 100.00% Not Required to be compensated further
110.00% 104.00% Not Required to be compensated further
120.00% 106.50% Not Required to be compensated further
130.00% 109.00% Not Required to be compensated further
All numbers represent Financial Capacity per inhabitant in a Lander as a % of the average financial capacity per inhabitant across the Federation

 Although such arrangements of grants might sound like penalizing the rich and/ or financially disciplined Landers for their good work to compensate the poorer and/ or less financially disciplined Landers, a positive correlation can be seen between a German State’s population and its financial strength (unlike the Indian scenario). This factor greatly avoids chances of unfair compensation for poor performance/ discipline.

Also, another key difference is that the supplementary grants are usually time bound and not perpetual (like the East German State gets 105 bio Euros till 2019 to build up infrastructure which was comparatively underdeveloped as a result of partitioning of Germany), which indirectly encourages the recipients of such grants not to take it for granted and instead to work towards improving their financial health.

 Switzerland: The Swiss Republic that has a population of just about 8.5 million (just for comparison, the population of Bengaluru city alone is about the same), considers itself a heterogeneous country – because of its multi-lingual* and multi-confessional** nature!

*There are four official national languages, German (65%), French (20%), Italian (8%), Romansch (1%); other languages count for about 6 % of the population.

**Religion is divided into 47% Roman Catholic, 41% Protestant; 12% belong to other religions or have no declared religious affiliation.

 Without delving a lot (into the rightful importance the Swiss have attached to diversity despite these seemingly small numbers when compared to the Indian scene) given the context here is “Taxation”, this very presence of diversity has prompted the Swiss to create a highly decentralized system for themselves to be able to best address the diverse needs of the diverse 8.5 million population! The idea of decentralization clearly reflects in the way taxation and public expenditure powers and leeway the various levels of governments possess. Let’s see more on this in the following sections.

 The table below provides a view of some of the most important taxes and their collection authorities:

Taxation Powers in Switzerland
Federal Income Tax, Corporate Tax, VAT
Cantons (States) Income Tax, Wealth Tax, Corporate Tax
Communes (Municipality) Income Tax, Wealth Tax, Corporate Tax

As can be seen from the above table, Income, Wealth and Corporate Tax collection span across multiple levels of government. The split is achieved by a moderate taxation at each level so that no single government exhausts the entire tax capacity – and more importantly, the assessment of priority is first to the Cantons, then to the communes and lastly to the Confederation.

Even the Cantons and Communes’ share of the Income Tax is entirely paid in the canton and the communes of residence; and any income obtained in other jurisdictions is assessed in the jurisdiction of residence according to the rules of the jurisdiction of residence (and not the rule of the jurisdiction where the income has been gained).

A similar treatment is given to Corporate Tax as well – when corporate business takes place in several jurisdictions, the yields of the profit and capital taxes are distributed between those jurisdictions according to financially measurable components of the activity (for example turnover, the volume of sales, total insurance premiums for insurance companies).

 A more granular split of the revenues that the three levels of government have a final handle on is as shown below:






(Local Corporations)

Taxes on Income and Wealth 30.19% 39.58% 30.23%
Consumption or expenditure


92.68% 7.06% 0.26%
Fiscal Monopolies, Licences 25.04% 62.75% 12.21%
Revenues from public property 47.41% 24.87% 27.73%
Revenue-sharing 0.11% 75.95% 23.94%
Grants-in-aid 0.11% 72.17% 27.72%
Indemnities and sales 10.65% 41.91% 47.44%
Total 33% 40% 27%

 The cantons and the communes enjoy a similar autonomy with the public expenditures as well, thereby being able to spend on focussed local situations.

Respective shares of public expenditures
  Split between 3 layers of Government Split within budget of a Government layer
Function Confederation Cantons Communes Confederation Cantons Communes
Administration 18% 38% 44% 3% 5% 9%
Public Order 7% 67% 26% 1% 8% 5%
National Defense 90% 5% 5% 11% 1% 1%
Foreign Affairs 100% 0% 0% 4% 0% 0%
Education 12% 53% 35% 7% 24% 23%
Culture & Sports 13% 31% 56% 1% 2% 5%
Health 1% 56% 43% 0% 16% 18%
Social Affairs 44% 37% 19% 27% 19% 14%
Transportation 51% 32% 17% 18% 9% 7%
Environment 12% 24% 63% 1% 2% 9%
Economy 52% 40% 8% 10% 6% 2%
Finance 51% 27% 22% 15% 7% 8%
Total 33% 40% 27% 100% 100% 100%

 It can be seen that the Swiss Cantons and the Communes have a direct handle on 2/3rd of the total revenues and expenditure to achieve public policy delivery.

 Conclusion: Study on the above two advanced countries is just an example to illustrate the importance of decentralized policy delivery and hence the importance of flexibility with revenue generation (taxation) and public expenditure.

Unless India takes a leaf out of such example models, localized policy delivery will be elusive eternally and hence ineffective and less relevant policy delivery will continue until that time!

15th Finance Commission – A look at the Terms of Reference

Authored By: Shreyas B. T

As the regular practice goes once every 5 years, the President of India has now constituted a new Finance Commission (FC) – the 15th FC for the period 2020-25, and so its Terms of Reference (ToR) has been published as well alongside. (For a recap on the mandate of the FC, its composition etc, the article on the 14th FC can be referred to.)

 ToR for a Finance Commission is a set of areas that the President mandates the FC to formulate its recommendations on. Besides the mention of the core mandated areas like tax devolution formula, grants-in-aid etc, the ToR invariably also has a set of “other” areas on which the President mandates the FC to provide its recommendations in the interests of the sound finance.

Although the FC is predominantly a quasi-judicial body and hence supposedly independent, the FC can arguably be led into certain areas* to suit the Center’s preferences by careful handling of the ToR.

 Some of the key terms of reference for the 15th FC, other than the core items (like tax devolution formula, grants-in-aid etc) are:

  • Usage of 2011 population data in the tax distribution formula
  • Review the need for revenue deficit grants
  • Review the so-called increased tax devolution of the 14th FC
  • Factor in some kind of performance-based ‘incentives’ for States based on:
    • States’ efforts on tax net under GST
    • Efforts in moving towards replacement rate of population growth
    • Implementation of GoI’s flagship schemes
    • Progress in increasing capital expenditure, eliminating losses of power sector
    • Promoting digital economy
    • Ease of doing business
    • Degree of States’ Populist measures (negative measure)
    • Efforts towards improving sanitation, solid waste management and end open defecation

The remainder of this paper aims to dissect some of these key terms of reference in the context and interest of Federalism, State autonomy in key financial matters and revenues at its direct control and disposal. One needs to wait and watch the final set of recommendations by the FC, especially around performance-based incentives and revenue deficit grants.

 Usage of 2011 population data for tax distribution:

Like touched upon in the article on the 14th FC, using the most recent demographic data in determining horizontal tax distribution is very logical. But given the aggressive population control policy adopted across the country since the 70’s, and some of the large States miserably failing in this, using the latest population statistics turns out to be disadvantageous to the relatively smaller yet better performing States on population control.

However, a possible saviour in the ToR of the 15th FC is the mention of incentivising States based on efforts moving towards replacement rate of population growth. It’s a matter of concern though that few of the large, populous north India States are still at very high TFRs contrary to the relatively smaller south India States, leading to unprecedented demographic shift/ migration. The limited pros and mostly cons of this shift is a different topic altogether, albeit extremely important.

 Review the need for revenue deficit grants:

Revenue deficit grants are the additional ‘transfers’ to the States to cover for post-devolution revenue deficits**, if any. In simpler words, these are additional compensation only to those States that would be in deficit even after factoring in the horizontal divisible pool distribution formula.

 So, if this grant need to be stopped, the 15th FC should somehow ensure a more robust horizontal devolution methodology – particularly address the anomalies around large weights assigned to Population (which would directly nudge the expense part higher) and Income Distance (which would directly pull the revenue part lower), due to which an undeservingly large amounts are currently getting diverted to some of the large yet poor performing States.

 Review increased tax devolution by the 14th FC:

It is now well marketed that the Center, by accepting 14th FC’s recommendations has devolved the highest percentage of divisible pool (from 32% to 42%) to the States and hence is pro-Federal.

Although this is true to the extent of providing greater flexibility to the States through increasing tax devolution (for unplan accounts), the plan transfers and grants have almost proportionately reduced – thereby leaving the aggregate transfers only slightly higher (approx. 4% higher) in comparison to the 13th FC.

Given the difference is already not as high as broadly perceived, there is hardly any room for reduction. So this will be yet another area that warrants a close watch, that could potentially decide the amount of flexibility and fiscal autonomy the States would have.

Performance based incentives to States:

While incentivising the States based on performance is surely a welcome measure, given the presence of major anomalies currently in the devolution formula effectively penalising good performance, hopefully these anomalies will be fine-tuned and addressed by the 15th FC.

Moreover, areas like GoI’s flagship schemes, GST etc are predominantly delivered by Central government departments and agencies, it will be highly complicated to quantify State government’s performance and hence the degree of incentives too in such areas. It should also be noted that most of these schemes are arguably anti-Federal in the first place, including measuring the ‘badness’ of a State policy in the context of populism can be very circumstantial, subjective and hence controversial – all the more reasons for these aspects not to be included in the assessment to devolve taxes, instead of striving towards making the States more and more empowered and accountable for it to manage its revenues and expenditures more autonomously.


The ToR also makes a mention of a New India – 2022. India is an union of States. A prosperous India is possible only when its States do well. States can do well only when we become a truly Federal and a decentralised setup, instead of further centralizing even the resources available at the States’ disposal. The sooner we realize that for India to come first, the States have to first come first, the more practical will be a New India – 2022.


 *One such example being the directive to the 14th FC to take into account the demographic changes that have taken place subsequent to 1971. As described in the article on the 14th FC, it sounds completely logical to base the distribution on the most recent demographic conditions, however by completely ignoring the efforts by States that have done well in population control and thereby not incentivising them, this particular term of reference eventually meted out an unfair deal for better performance.

**As per the 14th FC’s recommendations, 11 States are currently receiving this grant – they are, AP (the split version of the State), Assam, HP, J&K, Kerala, Manipur, Meghalaya, Mizoram, Nagaland, Tripura and West Bengal.

Going by this list of States that have a post-devolution deficit, it can be seen that this situation would arise due to,

  • A low tax effort of a State OR
  • Vertical devolution alone unable to meet the minimum required administrative expenses (mostly for small sized States) OR
  • Both

Federalism, Taxation & 14th Finance Commission

Authored By: Shreyas B. T

Taxation powers for the Union and the States; and Revenue sharing between them are two of the key elements in any Federal setup, which directly determines if the most appropriate government layer is involved in public expenditure towards the respective policy items.

It is all the more key for the Indian union, given its geographical size, large & diverse population and hence significantly dissimilar problems among different regions/ States.

 India, being a (quasi) Federal democracy, also has its own setup of taxation power split between various government layers – like Center, State, City Corporation, Village Panchayat et al; and sharing the collected revenue with the other layers of government.

 Is it a most suitable setup? Does it have unnecessary revenue aggregation and segregation steps? Does it harmonize or does it do more harm?

 In this artcile, let’s try and understand the details around these aspects with a reference to the latest (14th) Finance Commission’s recommendations. Let’s first see the basic principles of taxation powers of the various levels of the governments in India, then its segregation to the next levels of governments:

Centre Cess & Surcharges Not shared with States
Corporation Tax, Income Tax (other than Agricultural), Excise Duty, Service Tax, Customs Duty, STT Shared with States (Divisible Pool)
Central Sales Tax, Duties on property succession, Taxes on railway fares a freights Assigned to States (roughly based on origination; to the “exporter” State in case of CST)
States Stamp Duties & Excise Duties Levied by Centre; collected & retained by States
VAT, Agricultural Income, Agri Land Estate Duty, Capitation Tax, Road & Vehicle Tax Levied, collected & retained by States
Municipalities Property Tax  

 Finance Commission (FC) in India and the 14th FC

Article 280 of the Constitution of India provides for a finance commission as a quasi-judicial body. It is constituted by the President of India every fifth year. It consists of a chairman and four other members to be appointed by the president.

It’s mandate will be to provide recommendations about the following to the President of India:

  1. The distribution of the net proceeds of taxes between the centre and the states and the allocation between the states of the respective shares of such proceeds.
  2. The principles that should govern the grants in aid to the states by the centre.
  3. The measures needed to augment the consolidated fund of states to supplement the resources of the local governments in the states on the basis of the recommendations made by the State Finance Commissions.
  4. Any other method referred to it by the President in the interests of the sound finance.

The recommendations made by finance commission are only advisory in nature and hence, are not binding on the government.

Key Recommendations of the 14th FC:

  • Sharing of Union Taxes
    • Vertical Distribution – 42% of the divisible pool
    • Horizontal Distribution
  • Moving away from the Plan and non-Plan distinctions
    • Reduction in grants, and greater emphasis on devolution
    • Discontinuation of sector specific grants
  • Grants in Aid for Local Bodies
    • 87 Lakh Cr. for 5 year period
    • 90% based on Population
    • 10% on Area
  • Post Devolution Revenue Deficit: Rs. 48,906 Cr. grant for 11 revenue deficit States
  • Others (Public Utility Pricing, Fiscal Deficit Review, Disinvestment, GST, Climate, Disaster Recovery Fund, etc)

Let’s discuss in detail on some of the key recommendations of the 14th FC, particularly around the tax devolution, its formulae and GST effect on State finances.

Vertical Devolution:

The 14th FC has recommended a 42% vertical devolution of the divisible pool of the Centre’s taxes to the States. This was 32% in the 13th and 30.% in the 12th FCs.

As can be seen, this is a big jump from the previous FCs with an underlying theory of reducing Plan transfer (like Centrally Sponsored Schemes) where the States would not have a lot of flexibility on choosing the most relevant areas of expenditure. With an increased tax devolution and reduced dependency for States on the plan transfers, the idea is to promote self sufficiency for the States in the spirit of cooperative Federalism.

Horizontal Distribution:

The 42% share earmarked to be devolved to the States would then follow a Horizontal Distribution formula to arrive at the individual States’ proportionate share.

Horizontal Tax Distribution
  14th FC 13th FC 12th FC
Population (Basis 1971) 17.5% 25.0% 25.0%
Population (Basis 2011) 10%
Fiscal Capacity as Income Distance 50% 47.5% 50%
Land Area 15% 10.0% 10.0%
Forest Cover 7.5%
Fiscal Discipline 0% 17.5% 7.5%
Tax Effort 0% 7.5%
Total 100.0% 100.0% 100.0%

Source: Table 8.1 of Fourteenth Finance Commission report

Based on this horizontal distribution formula, the table below provides an approximate State-specific share of the divisible pool of taxes.

Inter-Se Share of States   Inter-Se Share of States
State 14th FC 13th FC Change

(13th -> 14th FC)

  State 14th FC 13th FC Change

(13th -> 14th FC)

Uttar Pradesh 17.96% 19.68% -1.72%   Telangana 2.44%
Bihar 9.67% 10.92% -1.25%   Jammu & Kashmir 1.85% 1.55% 0.30%
Madhya Pradesh 7.55% 7.12% 0.43%   Punjab 1.58% 1.39% 0.19%
West Bengal 7.32% 7.26% 0.06%   Arunachal Pradesh 1.37% 0.33% 1.04%
Maharashtra 5.52% 5.20% 0.32%   Haryana 1.08% 1.05% 0.04%
Rajasthan 5.50% 5.85% -0.36%   Uttarakhand 1.05% 1.12% -0.07%
Karnataka 4.71% 4.33% 0.38%   Himachal Pradesh 0.71% 0.78% -0.07%
Odisha 4.64% 4.78% -0.14%   Meghalaya 0.64% 0.41% 0.23%
Andhra Pradesh 4.31% 6.94% -2.63%   Tripura 0.64% 0.51% 0.13%
Tamil Nadu 4.02% 4.97% -0.95%   Manipur 0.62% 0.45% 0.17%
Assam 3.31% 3.63% -0.32%   Nagaland 0.50% 0.31% 0.18%
Jharkhand 3.14% 2.80% 0.34%   Mizoram 0.46% 0.27% 0.19%
Gujarat 3.08% 3.04% 0.04%   Goa 0.38% 0.27% 0.11%
Chhattisgarh 3.08% 2.47% 0.61%   Sikkim 0.37% 0.24% 0.13%
Kerala 2.50% 2.34% 0.16%          

Source: Table 8.2 of Fourteenth Finance Commission report

It very clearly shows that a good 40% of the total divisible pool is diverted towards the so-called heartland of India, somewhat infamously referred to as the BIMARU states that yield rich political dividends for parties that can woo those states.

It does obviously follow a set of laid out principles (i.e., the horizontal distribution formula) recommended by the Finance Commission. Yet, a seemingly continued skewed allocation prompts a much closer look at the distribution formula itself.

Population and Demographic Change:

The 14th FC has recommended a weight of 17.5% to the 1971 population and a 10% weight to the 2011 population. Both 1971 and 2011 population figures have been considered to factor in the demographic changes since 1971, like composition of population and migration.

Although going with a more recent population sounds very logical at the outset, a quick look at the population statistics of both 1971 and 2011 demonstrate how the smaller States with much better discipline in population control is at a significant disadvantage.

Population in Crores Population Distance From UP (example)
  2011 1971 Change

(1971 onwards)

2011 1971
Uttar Pradesh 19.9 8.3 239.76%
Karnataka 6.1 2.9 210.34% 0.31 0.35
Kerala 3.3 2.1 157.14% 0.17 0.25
Tamil Nadu 7.2 4.1 175.61% 0.36 0.49
West Bengal 9.1 4.4 206.82% 0.46 0.53
Maharashtra 11.2 5 224.00% 0.56 0.60

The above table illustrates the relative population weights of a State like MH that is perhaps the strongest economic performer, some of the more disciplined States in population control (TN, KA etc) those are also strong economic performers, and a State like UP that has the highest population with no signs whatsoever of slowing down its population.

Although there is a direct correlation between population and the cost to deliver public policies and social welfare schemes to them, and hence it is very logical to allocate more funds to the more populous States, statistics provided above clearly shows that these States have continuously failed in population control for many decades. This naturally continues to skew the fund allocation towards such States, effectively incentivising poor performance and penalizing better performing States (population control in this context).

Fiscal Capacity (as Income Distance):

Fiscal Capacity as Income Distance is a measure to determine the economic backwardness of a state. The more backward the state, the more fund allocation for it! The main intent being harmonization and bringing all states to a comparable level of living conditions.

Successive FCs have used some form of Income Distance (be it, per capita Income or per capita Taxable capacity or per capita GSDP) and with a huge weightage (50% in the 14th FC) in the horizontal distribution split.

The 14th FC has calculated the income distance following the method adopted by the 12th FC. A three-year average (2010-11 to 2012-13) per capita comparable Gross State Domestic Product (GSDP) has been taken for all the twenty-nine States. Income distance of each State has been computed by taking the distance from the State having highest per capita GSDP. Goa has the highest per capita GSDP, followed by Sikkim. However, since both these are very small States, the next highest GSDP State Haryana has been considered as the reference State to arrive at the Income Distance of all the States.

State Average Per Capita GSDP

(Rs. Thousand Lakhs)

(2010-11 to 2012-13)


Income Distance

Haryana (Reference) 116.1793
Uttar Pradesh 33.8154 70.89%
Karnataka 76.7809 33.91%
Tamil Nadu 98.3267 15.37%
West Bengal 58.3234 49.80%
Maharashtra 103.0914 11.27%

Source of GSDPs: Annex 8.5 of Fourteenth Finance Commission report

Greater the income distance of a State with the reference State (Haryana), larger is its share in the horizontal distribution. This sounds fair in a Federal setup, where ideally the various levels of governments should collectively ensure and minimize income and regional imbalances.

However, a continued lacklustre performance by the most populous States for many decades, both on the financial and population control fronts again results in a skewed allocation towards such States, effectively incentivising poor performance and penalizing better performing States – to give some quantitative perspective of the effect of Income Distance on the relative weightages, UP gets more than double the weightage than Karnataka!

On one hand a huge population, on the other hand a huge income distance for such a large population says one thing aloud – it’s a huge burden on those who’re having to pay up trying to reduce this gap since decades without a respite!

Fiscal Discipline:

Fiscal Discipline, a measure of the State’s handling of its finances was one of the components in the horizontal distribution formula till the 13th FC (17.5%). The 13th FC had come up with a Fiscal Discipline measure called IFD (Index of Financial Discipline), which is basically a ratio of own revenue receipts of a State to its total revenue or current expenditure. Improvements in IFD are measured as the difference in the ratio between the base period (2001-02 to 2003-04 years by FC-13) and the reference period (2005-06 to 2007-08 by FC-13). Improvements in this ratio are then compared to the average for all States; and States with relatively higher improvement than the average for all States received higher transfers.

However, the 14th FC has done away with Fiscal Discipline as a horizontal distribution component citing inaccurate methodology. This is because, the 13th FC considered the improvement in IFD from the base to the reference year, and the relative improvement (delta) figures would naturally tend to be higher for States having a significantly lower IFD to start with (base year).

So the delta IFD being inaccurate to horizontally distribute revenues has merit, because it would result in a State like Bihar getting a much bigger weightage for  its higher improvement factor (delta), despite being much lower when stack ranked against other better performing States’ IFD. A quick look at the States’ own IFD and their relative IFDs (relative ratio to all States) suggest that States like KA, MH, TN, GJ etc have been consistently maintaining much better financial prudence, yet not being rewarded by means of proportionally higher horizontal devolution by not factoring in their fiscal discipline.

Notwithstanding the current statistics which are arguably inaccurate, it is anybody’s guess on how sensible it would be to include Fiscal Discipline (in some logical form) in horizontal devolution to encourage good fiscal prudence.

Index of Fiscal Discipline
Sl. No. States Own Revenue / Revenue

Expenditure (%)

Relative to all States (ratio)  
Average 2001-

02 to 2003-04

Average 2005-

06 to 2007-08

Average 2001-

02 to 2003-04

Average 2005-

06 to 2007-08

Index of Change


1 Andhra Pradesh 59.58 69.49 1.18 1.11 0.94
2 Arunachal Pradesh 10.99 23.92 0.22 0.38 1.76
3 Assam 34.51 44.99 0.68 0.72 1.05
4 Bihar 24.46 23.4 0.48 0.37 0.77
5 Chhattisgarh 56.88 72.3 1.13 1.16 1.03
6 Goa 78.01 86.98 1.54 1.39 0.9
7 Gujarat 61.97 78.54 1.23 1.26 1.03
8 Haryana 79.24 94.37 1.57 1.51 0.96
9 Himachal Pradesh 22.52 40 0.45 0.64 1.44
10 Jammu & Kashmir 22.83 24.33 0.45 0.39 0.86
11 Jharkhand 52.6 48.5 1.04 0.78 0.75
12 Karnataka 64.1 82.07 1.27 1.31 1.04
13 Kerala 55.33 61.16 1.1 0.98 0.89
14 Madhya Pradesh 46.86 57.29 0.93 0.92 0.99
15 Maharastra 67.24 87.22 1.33 1.4 1.05
16 Manipur 7.54 11.69 0.15 0.19 1.26
17 Meghalaya 21.05 24.08 0.42 0.39 0.93
18 Mizoram 6.62 11.16 0.13 0.18 1.36
19 Nagaland 6.99 9.63 0.14 0.15 1.11
20 Orissa 37.02 52.72 0.73 0.84 1.15
21 Punjab 59.11 71.93 1.17 1.15 0.98
22 Rajasthan 46.94 59.69 0.93 0.96 1.03
23 Sikkim 26.46 29.19 0.52 0.47 0.89
24 Tamil Nadu 67.2 81.88 1.33 1.31 0.99
25 Tripura 15.88 16.91 0.31 0.27 0.86
26 Uttar Pradesh 37.13 49 0.74 0.78 1.07
27 Uttarakhand 37.56 46.54 0.74 0.75 1
28 West Bengal 33.63 37.83 0.67 0.61 0.91
    50.51 62.43 1 1 1

Source: Annex 8.6 of Thirteenth Finance Commission report

Tax Effort:

Tax Effort, a measure of a State’s ability and initiatives undertaken to improve its tax base and hence relative tax generation was one of the components in the horizontal devolution till the 12th FC (with a weightage of 7.5%).

This was discontinued by the 13th FC citing the Fiscal Discipline component anyway captures the States’ tax effort also. This surely sounds reasonable to a degree, but tax effort has been kept out by the 14th FC also despite taking Fiscal Discipline also off the horizontal devolution criteria. This surely is a double blow for States generating higher tax revenues (to the Union’s divisible pool) as well as to the States managing its finances with prudence.

Land Area & Forest Cover:

Land Area has been one of the parameters in the horizontal devolution split since the 12th FC with a view that the greater the land area of a State, higher are the administrative expenses and public expenditure. The 14th FC has retained this and increased its weightage from 10% to 15%. The increase in weightage is debatable, considering other performance related parameters like Fiscal Discipline and Tax Effort have been dropped.

Forest Cover has been included as a new parameter to the horizontal devolution split to factor in the opportunity cost for States having large forest cover. This is with a fair view that the forests can’t and shouldn’t be cleared indiscriminately to make way for industrialization.


GST subsumes into it a variety of Union and State taxes. The largest among those (in terms of total tax revenue) are the Union’s Excise & Service Tax, and the States’  VAT & CST.

Although most of it, in theory, gets into the Center’s divisible pool and hence would reach the States as per the horizontal devolution formula, States would now lose control over its largest revenue pools VAT and CST (CST was assigned to the “exporter” state pre-GST, whereas will now get subsumed under the “importer” State’s SGST), which otherwise would be in their  direct control.

This is a major impact on the industrialized States. The GST council has suggested a compensation mechanism to address this, but it is in a tapering manner that would eventually cease to exist after 5 years, with theories and assumptions that the introduction of GST would propel the economy to great heights and everything would be normalised by the end of 5 years!


One of the basic drivers of Cooperative Federalism is for the Center and the States to cooperate and work together on governance and administrative aspects and run a well oiled machine – and one of the key desired outcomes of it (in the context of this paper) being a harmonized and near uniform living conditions across the length and breadth of the Country.

Some of the analyses presented above very clearly show continued skewed allocation of the divisible pool to make up for a continued lack of performance by certain states. There may surely be genuine constraints (like geographical, historical, literacy et al which are outside of the context of this paper) for its backwardness, but decades of mismanagement and hence terribly slow turnaround is clearly hurting everyone.

As if that were not enough, the recent introduction of GST would add to the woes of the “contributing” states due to the tables tilting towards the “importer” states as against the “exporter” states.

It is very clear that decades of diverting tremendous amounts of funds in the guise of harmonization and equalisation isn’t working at all; and the loss to the industrialized States’ revenue stream (VAT and CST) and much higher dependency on Central tax devolution and its policies, the worst fear is if all this would eventually lead the better performing States also to drop the ball which would be the death knell for even Competitive Federalism and killing the cash cows!

Hence, it is anybody’s guess that the need of the hour is for some drastic and bold measures in the interest of the whole Nation.