Explain how cesses and surcharges alter the effective working of vertical devolution in India. Discuss why this has become a major Centre–State dispute despite an unchanged devolution percentage. Suggest reforms to restore predictability and fairness in fiscal federalism.
Kartavya Desk Staff
Topic: Issues and challenges pertaining to the federal structure, devolution of powers and finances
Topic: Issues and challenges pertaining to the federal structure, devolution of powers and finances
Q2. Explain how cesses and surcharges alter the effective working of vertical devolution in India. Discuss why this has become a major Centre–State dispute despite an unchanged devolution percentage. Suggest reforms to restore predictability and fairness in fiscal federalism. (15 M)
Difficulty Level: Medium
Reference: TH
Why the question Centre–State fiscal relations are under strain because States increasingly argue that the devolution percentage is stable only on paper, while the shareable tax base is shrinking. Key Demand of the question The question requires explaining the mechanism through which cesses and surcharges reduce the effective divisible pool and weaken vertical devolution in practice. It also demands reasons for the Centre–State dispute despite an unchanged devolution percentage, and reforms to restore predictability and fairness. Structure of the Answer Introduction Briefly define vertical devolution and highlight that effective federal balance depends on the divisible pool size, not only the devolution rate. Body Explain how non-shareable levies reduce the divisible pool and thereby lower States’ effective fiscal share even with the same percentage. Discuss why this has become contentious due to States’ rising expenditure burdens, reduced fiscal autonomy, and increased dependence on conditional transfers. Suggest reforms such as rule-based limits/sunset clauses for cesses, stronger parliamentary scrutiny, and redesign of transfer architecture to improve predictability. Conclusion Conclude that fiscal trust is a prerequisite for cooperative federalism, and restoring it requires transparent, rule-based revenue-sharing consistent with constitutional federalism.
Why the question
Centre–State fiscal relations are under strain because States increasingly argue that the devolution percentage is stable only on paper, while the shareable tax base is shrinking.
Key Demand of the question
The question requires explaining the mechanism through which cesses and surcharges reduce the effective divisible pool and weaken vertical devolution in practice. It also demands reasons for the Centre–State dispute despite an unchanged devolution percentage, and reforms to restore predictability and fairness.
Structure of the Answer
Introduction Briefly define vertical devolution and highlight that effective federal balance depends on the divisible pool size, not only the devolution rate.
• Explain how non-shareable levies reduce the divisible pool and thereby lower States’ effective fiscal share even with the same percentage.
• Discuss why this has become contentious due to States’ rising expenditure burdens, reduced fiscal autonomy, and increased dependence on conditional transfers.
• Suggest reforms such as rule-based limits/sunset clauses for cesses, stronger parliamentary scrutiny, and redesign of transfer architecture to improve predictability.
Conclusion Conclude that fiscal trust is a prerequisite for cooperative federalism, and restoring it requires transparent, rule-based revenue-sharing consistent with constitutional federalism.