The primary responsibility of the Finance Commission with regard to tax proceeds is to distribute them between the Centre and states. This distribution is done in accordance with the principles and criteria set by the Finance Commission.

Distribution of Tax Proceeds:

The Finance Commission is a constitutional body that is established every five years. Its primary role is to recommend the distribution of tax proceeds between the Centre and states. The tax proceeds primarily come from the collection of various taxes by the central government.

The Finance Commission takes into consideration several factors while recommending the distribution of tax proceeds. These factors include the needs and resources of both the Centre and states, the overall objective of fostering balanced regional development, and the principles of equity and efficiency.

Principles and Criteria:

The Finance Commission follows certain principles and criteria while making its recommendations for the distribution of tax proceeds. These principles include fiscal federalism, horizontal and vertical equity, efficiency, and accountability.

Fiscal federalism ensures that both the Centre and states have the financial resources to perform their respective responsibilities. It aims to strike a balance between the Centre's need for revenue for national purposes and the states' need for resources to carry out their functions effectively.

Horizontal equity ensures that states with similar characteristics and needs receive similar shares of tax proceeds. This principle promotes fairness and equal treatment among states.

Vertical equity takes into account the differences in the fiscal capacity of states. States with lower fiscal capacity receive a higher share of tax proceeds to ensure a level playing field and promote balanced regional development.

Efficiency focuses on ensuring that the distribution of tax proceeds promotes economic growth and development. The Finance Commission takes into consideration the efficiency of resource allocation, expenditure patterns, and revenue-raising capacity of both the Centre and states.

Accountability ensures that the tax proceeds are utilized effectively and efficiently. The Finance Commission reviews the financial performance of states and makes recommendations to improve their fiscal management.

Overall, the primary responsibility of the Finance Commission with regard to tax proceeds is to recommend their distribution between the Centre and states based on principles of fiscal federalism, equity, efficiency, and accountability. This ensures a fair and balanced distribution of resources, fostering the development of all regions in the country.