UPSC Prelims Practice Questions — Fiscal federalism, efficiency versus equity concerns
Q1. Consider the following matters:
1. Distribution between the Union and the States of the net proceeds of taxes which are to be divided between them, and the allocation of the respective shares among the States
2. The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India
3. The measures needed to augment the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities in the State
4. The rates, including floor rates with bands, at which the tax on the supply of goods and services shall be levied
Which of the above are correctly identified as matters on which the Finance Commission makes recommendations to the President under Article 280(3)?
- Distribution between the Union and the States of the net proceeds of taxes which are to be divided between them, and the allocation of the respective shares among the States
- The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India
- The measures needed to augment the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities in the State
- The rates, including floor rates with bands, at which the tax on the supply of goods and services shall be levied
- A. 1 and 2 only
- B. 1, 2 and 3
- C. 2, 3 and 4
- D. 1 and 4 only
Q2. The report of the Sixteenth Finance Commission for 2026-31, together with an explanatory memorandum on the action taken on its recommendations, was placed before each House of Parliament under which one of the following provisions?
- A. Article 280(4), which empowers the Commission to determine its own procedure and makes its recommendations binding upon the Union Government
- B. Article 275(1), under which every grant-in-aid to a State must be approved by a resolution of both Houses before any sum is released
- C. Article 281, which requires the recommendations of the Commission, with an explanatory memorandum on the action taken, to be laid before each House
- D. Article 267(1), under which all advances made to the States are required to be regularised by each House at the close of the financial year
Q3. Consider the following pairings of persons with their position on the Sixteenth Finance Commission as it stood when the Commission submitted its report for the 2026-31 award period:
1. Arvind Panagariya — Chairman
2. Manoj Panda — Member
3. T. Rabi Sankar — Member
4. N. K. Singh — Member
Which of the above pairings is/are NOT correct?
- Arvind Panagariya — Chairman
- Manoj Panda — Member
- T. Rabi Sankar — Member
- N. K. Singh — Member
- A. 1 and 3
- B. 2 only
- C. 2 and 4
- D. 4 only
Q4. Consider the following statements regarding the States' share in the net proceeds of Union taxes (vertical devolution) recommended by successive Finance Commissions:
1. The Thirteenth Finance Commission recommended a share of 32 per cent.
2. The Fourteenth Finance Commission raised the share to 42 per cent.
3. The Fifteenth Finance Commission recommended 41 per cent for its award period.
4. The Sixteenth Finance Commission has recommended raising the share to 50 per cent for 2026-31.
Which of the statements given above is/are NOT correct?
- The Thirteenth Finance Commission recommended a share of 32 per cent.
- The Fourteenth Finance Commission raised the share to 42 per cent.
- The Fifteenth Finance Commission recommended 41 per cent for its award period.
- The Sixteenth Finance Commission has recommended raising the share to 50 per cent for 2026-31.
- A. 1 and 2 only
- B. 4 only
- C. 3 and 4 only
- D. 1 only
Q5. Which one of the following Finance Commissions recommended the single largest increase in the States' share of the net proceeds of Union taxes over the share recommended by its immediate predecessor?
- A. The Thirteenth Finance Commission, covering the award period 2010-11 to 2014-15
- B. The Fifteenth Finance Commission, covering the award period 2021-22 to 2025-26
- C. The Sixteenth Finance Commission, covering the award period 2026-27 to 2030-31
- D. The Fourteenth Finance Commission, covering the award period 2015-16 to 2019-20
Q6. In the formula recommended by the Sixteenth Finance Commission for distributing the States' share among the States, which one of the following parameters carries the highest weight?
- A. Population, as reckoned from the 2011 Census
- B. Income distance, measured from the highest per capita income State
- C. Area of the State
- D. Forest cover and its expansion between 2015 and 2023
Q7. Consider the following criteria and the weights attached to them:
1. Income distance — 42.5 per cent
2. Demographic performance — 10 per cent
3. Tax effort — 2.5 per cent
4. Contribution to Gross Domestic Product — 10 per cent
Which of the above are correctly identified as criteria, with their weights, in the horizontal devolution formula recommended by the Sixteenth Finance Commission for 2026-31?
- Income distance — 42.5 per cent
- Demographic performance — 10 per cent
- Tax effort — 2.5 per cent
- Contribution to Gross Domestic Product — 10 per cent
- A. 1, 2 and 3
- B. 2 and 4 only
- C. 1, 2 and 4
- D. 1 and 3 only
Q8. The 'divisible pool' out of which the States receive their share of Union taxes is best described as which one of the following?
- A. The combined tax revenue of the Union and the States, reduced by the compensation cess levied to make good the revenue losses of the States
- B. The gross tax revenue of the Union, reduced by the cost of collection and by the proceeds of cesses and surcharges levied by the Centre for its own purposes
- C. The gross tax revenue of the Union, reduced by the cost of collection and by the proceeds of the corporation tax and the Union excise duties
- D. The total revenue receipts of the Union, reduced by interest payments and by the grants-in-aid released to the States out of the Consolidated Fund of India
Q9. With reference to the Union Budget 2026-27 and the Government's response to the Sixteenth Finance Commission's recommendations, consider the following:
1. The vertical share of devolution to the States has been retained at 41 per cent of the divisible pool.
2. An amount of about Rs 1.4 lakh crore has been provided to the States as Finance Commission Grants for the financial year 2026-27.
3. The Finance Commission Grants so provided comprise rural local body grants, urban local body grants and disaster management grants.
4. Post-devolution revenue deficit grants have been restored for the States with effect from the financial year 2026-27.
Which of the above are correctly identified?
- The vertical share of devolution to the States has been retained at 41 per cent of the divisible pool.
- An amount of about Rs 1.4 lakh crore has been provided to the States as Finance Commission Grants for the financial year 2026-27.
- The Finance Commission Grants so provided comprise rural local body grants, urban local body grants and disaster management grants.
- Post-devolution revenue deficit grants have been restored for the States with effect from the financial year 2026-27.
- A. 1 and 2 only
- B. 2, 3 and 4
- C. 1, 3 and 4 only
- D. 1, 2 and 3
Q10. Recommendations on the apportionment between the Union and the States of the integrated tax levied on inter-State supplies, and on model laws for the levy on the supply of goods and services, are made by which one of the following bodies?
- A. The Commission constituted by the President under Article 280 of the Constitution
- B. The Council which the President may establish under Article 263 of the Constitution
- C. The Council established under Article 279A of the Constitution
- D. The Governing Council of the institution set up by a resolution of the Union Cabinet in 2015
Q11. Consider the following statements regarding the design of transfers recommended by the Sixteenth Finance Commission and the debate it has generated:
1. Post-devolution revenue deficit grants have been discontinued, the reasoning being that States have significant scope to raise revenues and rationalise expenditure.
2. Sector-specific grants have been retained, while State-specific grants alone have been discontinued.
3. A criterion rewarding a State's contribution to Gross Domestic Product has been introduced, which critics read as tilting the formula towards efficiency and away from the equalising role.
4. The criterion of tax effort, used by the Fifteenth Finance Commission, has been dropped.
Which of the statements given above is/are NOT correct?
- Post-devolution revenue deficit grants have been discontinued, the reasoning being that States have significant scope to raise revenues and rationalise expenditure.
- Sector-specific grants have been retained, while State-specific grants alone have been discontinued.
- A criterion rewarding a State's contribution to Gross Domestic Product has been introduced, which critics read as tilting the formula towards efficiency and away from the equalising role.
- The criterion of tax effort, used by the Fifteenth Finance Commission, has been dropped.
- A. 1 and 3
- B. 2 only
- C. 2 and 4
- D. 3 and 4 only