Content

1. Central Tax Devolution & GSDP Debate
2. Top Court’s Green Governance & Regulatory Uncertainty

Central Tax Devolution & GSDP Debate

Why in News ?

• Recommendations of the 16th Finance Commission are yet to be tabled in Parliament.
• Renewed debate on fairness of Centre–State fiscal transfers, especially by high-performing States.
• Rising concerns over GST-induced fiscal centralisation, cesses/surcharges, and skewed devolution outcomes.

Relevance

• GS II – Polity & Governance
  • Finance Commission and fiscal federalism
  • Centre–State relations; cooperative vs competitive federalism
  • GST and constitutional rebalancing of taxing powers
• GS III – Economy
  • Public finance, tax devolution, inter-governmental transfers
  • Efficiency vs equity in resource allocation
  • Regional disparities and inclusive growth

Practice Question

• “Tax collection does not necessarily reflect tax contribution of States.”
  Examine this statement in the context of the debate on using GSDP as a criterion for tax devolution. (250 words)

Background: India’s Fiscal Transfer Architecture

• Central transfers to States occur via:
  • Tax Devolution (as per Finance Commission recommendations)
  • Grants-in-Aid
  • Centrally Sponsored Schemes (CSS)
• 15th Finance Commission:
  • Recommended 41% devolution of gross tax revenue to States (2020–25).
  • Implemented fully; 16th FC awaited.

Core Issues in the Current System

• Erosion of State Fiscal Autonomy
  • GST subsumed major State taxes → reduced independent revenue handles.
  • GST rate cuts → revenue uncertainty.
• Rise of Non-shareable Revenues
  • Increasing use of cesses and surcharges by Centre (not devolved).
• CSS Dominance
  • Tied transfers constrain State-level expenditure priorities.
• Equity vs Efficiency Bias
  • Heavy reliance on:
    • Income distance
    • Population (often outdated base years)
  • Frequent changes in weights → unpredictability.
• Regional Disparities Persist
  • Wide variation in fiscal capacity and expenditure needs across States.

Tax Contribution vs Tax Collection: The Controversy

• High-income States (Maharashtra, Tamil Nadu, Karnataka):
  • Argue high contribution but low devolution.
• Counter-argument:
  • Direct tax collection is location-biased:
    • Based on PAN/registered office, not place of income generation.
• Distortions arise due to:
  • Multi-State firms
  • Migrant labour
  • Centralised corporate registrations
  • Absence of granular inter-State transaction data

Why GSDP is a Better Proxy ?

• Gross State Domestic Product (GSDP) reflects:
  • Actual economic activity
  • Underlying tax base in a State
• Assumptions (largely valid):
  • Similar tax administration efficiency across States
  • Stable direct tax-to-GSDP ratios
• Empirical evidence (2023–24):
  • Correlation:
    • GSDP vs Direct Taxes: 0.75
    • GSDP vs GST: 0.91
• GST being destination-based → relatively uncontroversial attribution.

Devolution Outcomes (2020–25): Key Data Insights

• Total transfers: ₹75.12 lakh crore
• Major recipients:
  • Uttar Pradesh: 15.81%
  • Bihar: 8.65%
  • West Bengal: 6.96%
• Their tax contribution (Direct + GST):
  • UP: 4.6%
  • Bihar: 0.67%
  • WB: 3.99%
• Major contributors:
  • Maharashtra: 40.3% contribution, 6.64% transfers
  • Karnataka: 12.65% contribution, 3.9% transfers
  • Tamil Nadu: 7.61% contribution, 4.66% transfers

Correlation Analysis 

• 15th FC devolution share vs actual transfers: 0.99
• Devolution share vs tax collections: 0.24 (very weak)
• GSDP share vs tax collections: 0.81
• GSDP share vs devolution: 0.58
  Inference:
• GSDP balances efficiency (contribution) and equity (redistribution) better than current criteria.

State-wise Anomalies Explained

• Haryana, Karnataka, Maharashtra:
  • Tax collection > GSDP share → HQ concentration effect.
• Tamil Nadu:
  • GSDP share > tax collection → production without tax booking.

Winners & Losers under GSDP-based Devolution

• Gainers:
  • Maharashtra
  • Gujarat
  • Karnataka
  • Tamil Nadu
• Losers:
  • Uttar Pradesh
  • Bihar
  • Madhya Pradesh
• Adjustments are moderate, not disruptive.

Policy Implications

• Higher weight to GSDP would:
  • Reflect true tax accrual
  • Recognise States’ contribution to national income
  • Improve perceived fairness
  • Strengthen credibility of India’s fiscal federalism
• Relevant for:
  • 16th Finance Commission deliberations
  • GST reform debates
  • Centre–State trust deficit

Top Court’s Green Governance & Regulatory Uncertainty

Why in News ?

• Increasing judicial intervention by the Supreme Court in environmental governance over the last decade.
• Concerns over regulatory uncertainty, role confusion, and policy instability arising from court-driven environmental management.
• Renewed debate on limits of judicial review vs executive regulation, especially in climate, pollution, and environmental clearances.

Relevance

• GS II – Polity & Governance
  • Judicial review vs separation of powers
  • Role of judiciary in policy-making
  • Accountability of regulatory institutions
• GS III – Environment
  • Environmental governance and regulatory capacity
  • Pollution control, environmental clearances
  • Sustainable development vs precautionary principle

Practice Question

• “Judicial intervention in environmental governance is often a response to regulatory failure but can itself become a source of uncertainty.”
  Critically examine. (250 words)

Core Argument of the Article

• The Supreme Court has shifted from reviewing legality of administrative action to micro-managing environmental governance.
• This shift has:
  • Weakened statutory regulators
  • Increased uncertainty for States, industry, and citizens
  • Blurred separation of powers

Key Trends Identified

• From Regulator-Corrector to Regulator-Substitute
  • Court increasingly issues continuing mandamus.
  • Replaces regulator discretion with judicial directions.
• Managerial Role of Judiciary
  • Court supervises implementation rather than correcting errors.
  • Results in ad hoc governance rather than rule-based regulation.

Illustrative Judicial Shifts

• Eco-Sensitive Zones (ESZs):
  • 2022: Mandatory 1 km ESZ around protected areas.
  • 2023: Partial dilution due to implementation challenges.
• Vehicle Pollution (NCR):
  • 2015: Blanket diesel vehicle ban.
  • 2016: Ban lifted, replaced with pollution charge.
  • Later: Coercive scrappage rules, then narrowed to BS-IV vehicles.
• Firecrackers & Air Pollution:
  • Near-total bans → festival-specific relaxations.
  • Result: Frequent litigation, exemptions, confusion.

Structural Cause: Regulatory Failure

• Weak enforcement
• Delayed notifications
• Poor monitoring
• Arbitrary exemptions
  → Invites judicial intervention, even if sub-optimal.

Doctrinal Inconsistency

• Court often:
  • Justifies intervention using consequentialist reasoning.
  • Later retreats due to implementation backlash.
• Example:
  • Vanshakti v Union of India (2025):
    • Post-facto environmental clearances invalidated.
    • Later reconsideration acknowledging disruption.

Problem of Expertise

• Courts rely on:
  • Expert committees
  • Ad hoc definitions (e.g., “Aravalli hills”)
• Issues:
  • Experts compensate for technical gaps but lack institutional continuity.
  • Rapid constitution and dissolution of committees → policy flip-flops.
  • Uniform judicial rules ignore ecological diversity across regions.

Consequences of Judicial Overreach

• Uncertainty for Regulated Actors
  • Industries face shifting compliance rules.
• State Capacity Erosion
  • Regulators hesitate, anticipating judicial override.
• Finality Without Process
  • Court rulings often bypass statutory sequencing.
• Distorted Accountability
  • Regulators answer to courts, not legislatures or citizens.

Institutional Cost

• Projects stalled before statutory clearance process concludes.
• Litigation becomes first resort, not last.
• Courts reshape:
  • Who decides
  • What evidence counts
  • How policies evolve

Suggested Corrective Approach

• Judicial Restraint with Regulatory Discipline
  • Court should:
    • Enforce statutory duties
    • Avoid substituting policy judgment
• Threshold-Based Intervention
  • Clear criteria for when court will intervene.
• Process-Oriented Oversight
  • Insist on:
    • Transparency
    • Timelines
    • Accountability
• Predictability
  • Avoid sweeping bans.
  • Specify evidentiary and implementation standards in advance.

Broader Governance Lesson

• Environmental protection is best achieved by:
  • Strong regulators
  • Clear rules
  • Stable enforcement
• Not by continuous judicial management.