Definition:
Divisible pool refers to the taxes of the central government that it should share with sub national or state governments in accordance with the recommendations of the Finance Commission.
What is the need of divisible pool?
- When it comes to distribution of tax revenues between centre and states, central government enjoys more share like corporate tax and personal income tax. This asymmetry in the distribution of tax revenue is called Vertical Fiscal Imbalances. But, states do have their own expenditure requirements.
- To solve this vertical imbalance, Constitution proposes for the creation of Finance Commission in every five years to recommend the transfer of resources from the centre to the states.(According to Article 280)
- Finance commission reviews the fiscal conditions of centre and states from time to time and suggests resource transfer from centre to states.
- Constitution itself points out which tax resources to be shared with states(in Article 270).These tax resources of the centre that are to be shared with states is called Divisible Pool of Taxes.
What all comes under divisible pool of taxes?
At present, all taxes of central government, except cess and surcharges are to be shared with the states.
A small case study
Recently in the Union Budget 2021-22, Government introduced an Agri Infra Cess on petrol and diesel -2.5 and 4 rupees respectively. But, this wont affect the price of these items, because government also decreased the excise duty by same amount.therefore no extra burden on consumers. Then, why government did this?
Because, money raised from cess goes directly to the centre. But, excise duty is to be shared with the states( because excise duty is the divisible pool).So in a bid to rope in more money, the government introduced the cess, at the expense of states. Granted, the centre can only use this money towards agri-infra initiatives.
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