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ClearIAS » Economics Notes » How do States get revenue from the Center?

How do States get revenue from the Center?

Last updated on April 2, 2020 by Alex Andrews George

Revenue of StatesHow do states get revenue from the Centre? Center-State finance is a confusing topic unless you have come across the above figure.

Most of the states depend on the centre for the large chunk of their revenue.

The devolution process was based on many complex formulae before. However, now things have changed. In this post, we help you understand how states get revenue from the Center.

How do States get revenue from the Center (now)?

  1. Devolution (States’ share of taxes): As states share of taxes from the Gross Tax Revenue. (This is extra-budgetary)
  2. Scheme Related Transfer: As Centrally Sponsored Schemes from the Scheme Expenditure. (Based on Budget Allocations).
  3. Finance Commission Grants: As Transfer to States from the Transfers, Expenditure, and Other Expenses. (Based on Budget Allocations)
  4. Other Transfers: Other grants or loans. (Based on Budget Allocations).

Devolution (States’ share of taxes)

As per the 15th Finance Commission Recommendations, 41% of the divisible pool should be devolved to the States. (vertical devolution)

While distributing the 41 per cent among states, the formula recommended the Finance Commission should be used – which takes into weight different parameters like Income Distance, Population of 2011, Area, Forest & Ecology, Demographic Performance and Tax Effort.

Without including in Union Budget, Center transfers states’ share of taxes from the Gross Tax Revenue. This forms a significant part of the devolution.

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Scheme Related Transfer

Another major transfer from the Center to states is in the form of Centrally Sponsored Schemes (CSS). This is part of the Union Budget.

Centrally Sponsored Schemes are divided into Core of the Core Schemes and Core Schemes.

Finance Commission Grants

Based on Finance Commission recommendations, the Center also gives states – (a) Revenue Deficit Grants (b) Sectoral Grants, and (c) Performance-based Incentives.

The Finance Commission Grants will be mentioned in the Union Budget.

Other Transfers

Other transfers include grants and loans given to states – as mentioned in the Union Budget.

Understanding the Center-State Transfers: Budget Profile

The above figure is a sample Budget Profile of the Union.

The areas where you should look for Centre-State transfers are the blue circles.

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As you can see the first big circle corresponds to states’ share of taxes which is extra-budgetary.

As part of the Budget, you can notice the Centrally Sponsored Schemes and Transfers to States (FC grants and other transfers)

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About Alex Andrews George

Alex Andrews George is a mentor, author, and entrepreneur. Alex is the founder of ClearIAS and one of the expert Civil Service Exam Trainers in India.

He is the author of many best-seller books like 'Important Judgments that transformed India' and 'Important Acts that transformed India'.

A trusted mentor and pioneer in online training, Alex's guidance, strategies, study-materials, and mock-exams have helped thousands of aspirants to become IAS, IPS, and IFS officers.

Reader Interactions

Comments

  1. Demos says

    July 6, 2015 at 11:09 pm

    Thanks a lot for the article. It had really become messy and I was searching for a consolidated article on this for a long time.

    Reply
    • ClearIAS.com says

      July 7, 2015 at 7:38 am

      Happy to know that someone has benefited. All the best!

  2. Sandy Messi says

    July 11, 2015 at 12:47 pm

    Thanks sitting for the article.

    Reply
  3. Bhanu P J says

    July 25, 2015 at 9:57 am

    nice article …….. u should write articles more regularly….greatly beneficial………and ur mock tests r pretty good too……….keep it up………thank u for selfless initiative

    Reply
    • ClearIAS.com says

      July 25, 2015 at 10:59 pm

      Our pleasure!

  4. balu says

    August 9, 2015 at 12:16 pm

    Hai sir very valuable material but have a small doubt on this topic that is…how the funds allocated as per new niti ayog..

    Reply
  5. balu says

    August 9, 2015 at 12:18 pm

    Is it by as old like planning commission..or not

    Reply
  6. balu says

    August 9, 2015 at 12:20 pm

    NCA is applicable or not as per the new niti ayog?

    Reply
  7. pratapmurkutla says

    August 20, 2015 at 9:39 am

    what is the difference between vertical tax devolution and horizontal tax devloution? could you please clarify on this…thanks

    Reply
  8. pratapmurkutla says

    August 20, 2015 at 2:13 pm

    vertical tax devolution is how much center is giving to all states as 41%.
    now among the given 41% how much each state gets will be horizontal share.

    Reply
  9. pratapmurkutla says

    August 20, 2015 at 3:37 pm

    Finance Commission while announcing the center-state tax share split deals only with the vertical tax devolution. This is confusing. according to article 280 FC deals with “The distribution of the net proceeds of taxes to be shared between the Center and the states,and the allocation between the states, the respective shares of such proceeds…” then how can we say that it deals with only vertical tax devolution…?

    Reply
  10. pratapmurkutla says

    August 20, 2015 at 4:20 pm

    In case of grants we do not use any formula..it is money in absolute terms..(post-devolution revenue deficit grants for States)

    Reply
  11. nagabhushanam yerramsetty says

    September 20, 2015 at 4:23 pm

    i am searching for this type of clarity. very much thankful to clear ias for this article which is very much helpful.

    Reply
  12. DJ says

    December 23, 2015 at 5:30 pm

    Direct release under Central Plan to State/ District level autonomous bodies/implementing agencies – Not applicable now. Why this is not applicable now?

    Reply
  13. pratapmurkutla says

    February 29, 2016 at 7:50 am

    Hi ClearIAS could you please clarfiy my doubt that difference between public expenditure and public consumption. And i think goverment spending is synonym to public expenditure.

    Reply
  14. Sandeep says

    August 10, 2016 at 3:25 pm

    The States of Andhra Pradesh, Assam, J&K, Himachal Pradesh, Kerala, Manipur, Meghalaya, Mizoram, Nagaland, Tripura and West Bengal (a total of 11 States) have been identified for receiving these revenue deficit grants.

    In this Andhra Pradesh is not a Special category state.

    Reply
  15. VAIBHAVA SRIVASTAVA says

    May 19, 2017 at 10:22 pm

    This is a really helpful article! Thanks a lot!

    Please help me with these queries please –
    1. Which all of these grants/transfers are covered as Statutory Grants (Article 275) which are decided by Finance Commission?

    2. Similarly which all are Discretionary grants (Article 280) which were earlier decided by Planning Commission? Who decides these now? Finance Ministry?

    3. Are any of the transfers decided by NITI Aayog right now?

    4. Who decides about CSS related transfers?

    Reply
  16. pavan kumar.k says

    May 22, 2017 at 12:19 pm

    fc deciding tax devolutions and non-plan grants are statutory. rest all like css,central plan assistance calculated by (gadgil mukharjee) now subsumed in revenue deficit grants of fc all are not mandatory .

    Reply
  17. Milan says

    August 26, 2017 at 8:09 am

    Outstanding article…..Thank you….I need more detailed explanation….

    Reply
  18. PKALGIKAR says

    May 20, 2020 at 12:43 am

    Hello Mr.George, Its a good concise article and your picture of center-state. However do you intend to write any article on how FC decides on the grant allocation in general

    Reply

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