Vertical versus Horizontal Devolution

Definition

Two dimensions of how central tax revenue is shared under the Finance Commission's award: vertical devolution is the share of the divisible pool given by the centre to the states as a whole, while horizontal devolution is how that states' share is divided among the individual states.

Key points

• Vertical devolution sets the percentage of the central divisible pool of taxes that goes to the states collectively (the rest stays with the Union).
• Horizontal devolution then distributes that pooled states' share across states using a formula with weighted criteria.
• The Fifteenth Finance Commission recommended a 41 percent vertical share to the states (lowered from 42 percent to account for the new union territories of Jammu and Kashmir and Ladakh); verify the latest commission's figures.
• Horizontal criteria typically include population, area, income distance (the gap from the richest state), forest and ecology, demographic performance, and tax effort.
• Both are recommended by the Finance Commission under Article 280; see concept finance commission and concept fiscal federalism.

Why it matters for CAPF

The vertical (centre-to-states share) versus horizontal (among-states share) distinction and the criteria are testable Finance Commission facts; verify the latest percentages.

Common confusion

Vertical devolution is the centre-versus-states split of the pool; horizontal devolution is the split among states; the 41 (or 42) percent figure refers to the vertical share.

Parent note

budget and fiscal policy