Explanations:The 15th Finance Commission (FC) is a body that recommends the distribution of funds between the Centre and the states in India. The vertical distribution refers to the share of the divisible pool of taxes that the Centre allocates to the states. This distribution is a critical aspect of the financial relationship between the Centre and the states, as it determines how much revenue each state receives from the Centre.
In the context of the 15th Finance Commission's report for the period 2021-26, a significant change occurred due to the reorganization of Jammu and Kashmir. Prior to the reorganization, Jammu and Kashmir was a state with its own legislative assembly and enjoyed a certain share of the divisible pool of taxes. However, with the reorganization, Jammu and Kashmir was bifurcated into two Union Territories: Jammu and Kashmir, and Ladakh. This change in status means that Jammu and Kashmir is no longer treated as a state and will be directly funded by the Centre.
As a result of this reorganization, the 15th Finance Commission had to adjust the vertical distribution between the Centre and the states. The Commission recommended reducing the vertical distribution to 41%. This reduction reflects the fact that Jammu and Kashmir, which was previously a state, is now directly funded by the Centre and does not participate in the normal vertical distribution process.
The vertical distribution percentage is a critical figure because it determines the financial autonomy of the states. A lower percentage means that the Centre retains a larger share of the divisible pool of taxes, which can impact the financial resources available to the states. The reduction to 41% is a direct consequence of the reorganization of Jammu and Kashmir and the new financial arrangements that come with it.
Understanding the implications of the 15th Finance Commission's report and the changes in the status of Jammu and Kashmir is essential for comprehending the financial dynamics between the Centre and the states. This knowledge is particularly important for students preparing for competitive exams such as the UPSC, SSC, and banking exams, where questions on such topics are common.