Tax effort criterion
Also called: Tax effort · Topic: Fiscal Federalism: Finance Commission, Devolution and Centre-State Finances · NCERT: Beyond NCERT
Meaning
The tax effort criterion is a devolution criterion that rewards states that collect more of their own tax compared with their tax base or income. It tries to stop states from relying on central transfers and neglecting their own tax collection. It is an efficiency criterion, because it rewards performance rather than need.
Example
The 15th Finance Commission (2021-26) gave tax and fiscal effort a 2.5% weight. Under it, a state that raised a higher share of its GSDP as its own tax revenue got a slightly bigger share of central taxes. The 16th Finance Commission (2026-31) dropped this criterion. It added a new "contribution to GDP" criterion with a 10% weight.
Don't confuse with
- Fiscal capacity: fiscal capacity is how much revenue a state could raise. Tax effort is how hard it actually tries, compared with that base.