Wales should be given the power to vary income tax from rates elsewhere in the UK by 2020, a commission set up to review devolution in the country has concluded.

Devolving income tax, the largest source of revenue in Wales, would be a “fundamental constitutional shift”, the Silk Commission says in its initial report, published on Monday.

The commission recommends that the Cardiff government introduce a bill allowing for a referendum in this parliament. If this timetable is adopted, a system whereby the Welsh and UK governments share the proceeds of income tax could be in operation by 2020.

Among the 33 recommendations in the commission’s 200-page report are the full devolution of business rates, stamp duty, landfill tax, aggregates levy and long-haul rates for air passenger duty.

However, it ruled out the devolution of corporation tax raising powers, unless this was part of a wider move involving Scotland and Northern Ireland.

The introduction of income tax varying powers would mean the Welsh government would be responsible for raising 25 per cent of its annual budget – the remainder made up by transfers from central government.

The income tax recommendation is a potential difficulty for the governing Welsh Labour party. Carwyn Jones, the party leader and first minister in the assembly government, has said he is not in favour, in the short term, of this power being devolved.

In a speech to the London School of Economics this month, he indicated his preference for a system where a portion of money raised in Wales would be “assigned” there but without the need for tax power devolution.

The commission was set up as part of the UK governing coalition agreement between the Conservatives and the Liberal Democrats, to address the anomaly that Wales has neither the tax varying powers enjoyed by Scotland nor the borrowing powers devolved to the Stormont assembly in Northern Ireland.

Although it can make legislation, the Welsh government is entirely dependent on a block grant from Westminster. This is worth just under £15bn a year, using the population-based “Barnett formula” for calculating funding for devolved administrations.

In any referendum debate, Welsh politicians and voters would have to decide whether being able to keep a portion of income tax raised in Wales would outweigh the reduction in the block grant received from London.

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