The correct option is (b).
Explanation
The Finance Commission determines the formula for horizontal tax devolution, which dictates how the divisible pool of taxes is distributed among the States. The Fifteenth Finance Commission (XV FC) recommended the devolution formula for the period 2021-26 based on specific weighted criteria to ensure equity and efficiency.
Analysis of Criteria:
The XV FC used the following six criteria for horizontal devolution, with their respective weights:
- Income Distance: 45%
- Population (2011 Census): 15%
- Area: 15%
- Forest and Ecology: 10%
- Demographic Performance: 12.5%
- Tax and Fiscal Efforts: 2.5%
Evaluating the items provided in the question against these criteria:
- Demographic performance: Correct. This was introduced to reward states for their efforts in controlling population growth (weight: 12.5%).
- Forest and ecology: Correct. This criterion accounts for the ecological services provided by states and the opportunity cost of maintaining forest cover (weight: 10%).
- Governance reforms: Incorrect. While governance reforms may be considered for specific grants-in-aid or performance incentives, they are not a direct parameter in the horizontal tax devolution formula.
- Stable government: Incorrect. This is not a criterion used by the Finance Commission for tax devolution.
- Tax and fiscal efforts: Correct. This was reintroduced to reward states with higher tax collection efficiency (weight: 2.5%).
Thus, three of the listed items (Demographic performance, Forest and ecology, Tax and fiscal efforts) were used as criteria.
Key Takeaway:
The Fifteenth Finance Commission's horizontal devolution formula consists of six parameters: Income Distance, Area, Population (2011), Demographic Performance, Forest & Ecology, and Tax & Fiscal Efforts.