Definition
Devolution to States
Devolution is the constitutionally mandated transfer of a share of the Centre's divisible tax pool to the states, as recommended by the Finance Commission.
India's Constitution divides taxation powers between the Centre and states but leaves states with limited revenue sources, so the Centre shares part of its tax collection with them. The Finance Commission decides the percentage of the divisible pool that goes to states and how it is split among them.
The split among states uses criteria like population, area, income distance and forest cover. Devolution is an entitlement, not a discretionary grant, which makes it more predictable for states than centrally sponsored schemes or grants-in-aid.
Related terms
- Gross vs Net Tax RevenueGross tax revenue is the Centre's total tax collection, while net tax revenue is what remains after the states' share is devolved to them.
- Finance CommissionThe Finance Commission is a constitutional body set up periodically to recommend how tax revenues should be shared between the Centre and the states.
- Grants-in-AidGrants-in-aid are financial transfers from the Centre to states or local bodies, given over and above their share of central taxes, often for specific purposes or to bridge revenue gaps.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.