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Indian Economic Policy

Notes The Commission recommended 40 per cent of the net proceeds of these duties to be distributed
among the States on the basis of population. The Second Finance Commission added to the list
of duties shared between the Union and the states, but reduced the share of the States from 40
per cent to 25 per cent. The Third Finance Commission increased the number of excisable
commodities in the divisible pool from 8 to 35 by including all commodities on which duties
were collected in 1960-61 but reduced the States’ share from the divisible pool from 25 per cent
to 20 percent. The Fourth Finance Commission enlarged the list to 45 commodities, but the
share of the duties was retained at 20 per cent. The Fifth and Sixth Commissions did not make
any change.
The Seventh Finance Commission, however, raised the States’ shares to 40 per cent of the net
proceeds. The Eighth Commission raised the States’ share to 45 percent and distributed 40 percent
on the basis of a new formula—the same as for income tax—and 5 per cent to deficit states. The
Ninth Finance Commission proposed to distribute the entire amount of 45 per cent as a consolidated
amount without dividing it into two components of 40 per cent and 5 per cent.
Finally, the Tenth Finance Commission has raised the share of the states in the net proceeds of
union excise duties to 47.5 percent. This rise in the States’ share in excise duties is to compensate
for the reduction in their share in come tax.
It is necessary to emphasise here that all finance commissions kept one basic objective, that is, to
increase the share of the States in the proceeds of Central excise duties. The first few finance commissions
brought in more and more central excise duties under the divisible pool, but reduced the
percentage share of the States. The Seventh, and subsequent Finance Commissions, however,
have
(a) brought all the Central excise duties under the divisible pool; and
(b) raised the share of the States from 20 per cent to 40 percent and then finally to 47.5 per
cent.
Thus, over the years, Finance Commissions have increasingly relied on Union Excise Duties in
meeting the revenue needs of the States.
Horizontal division
As regards the horizontal distribution of the proceeds of Central Excise Duties among States,
the Finance Commissions had initially adopted two criteria, viz., the population of the State
and the backwardness of the States. This system of distribution clearly favoured populous bin
economically backward states like Uttar Pradesh and Madhya Pradesh.
The Seventh Finance Commission was the first to introduce a new formula for distribution of
the States’ share of the Central excise duty : 25 per cent weightage equally to (a) population, (b)
increase in the per capita income of the state, (c) the percentage of the poor in each state, and (d)
a formula for income equalisation between states.
The Ninth Finance Commission (NFC) recommended the following method for distribution of
the net proceeds of the Union Excise Duties among the States :
(a) 25 per cent should be distributed among the States on the basis of 1971 population;
(b) 12.5 per cent should be distributed among the States on the basis of Income Adjusted
Total Population (IATP)
(c) 12.5 per cent should be distributed on the basis of index of backwardness;
(d) 33.5 per cent should be distributed on the basis of distance of the per capita income of a
State from that of the State having the highest per capita income i.e. Punjab; and
(e) the remaining 16.5 per cent should be distributed among the States with deficits, after
taking into account their shares from income tax, excise duties and other shareable taxes.
The Tenth Finance Commission used the same formula prepared for the sharing of income tax
for sharing the proceeds of 40 percent of excise duties among the states as well. The remaining
7.5 per cent is distributed among deficit states.

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