Fiscal Federalism in India

Fiscal Federalism in India

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A Central Government, 28 States, and 7 Union Territories make up India's Federal System. The Finance Commission, Planning Commission, Inter-State Council, and National Development Council are a few important institutions that act as intermediates among the central, state, and local governments and oversee financial relations between states and centre. Since 1918, when the Montague Chelmsford reforms were implemented, efforts to define the roles of the central and state governments have been made. The Government of India Act of 1935, on the other hand, clearly defined the roles of the two levels of government, and in many ways, the current constitutional assignments are very similar to it. The powers and duties of the federal government and the states are listed in the Constitution's 7th Schedule (Union List, State List, and Concurrent List).

A Central Government, 28 States, and 7 Union Territories make up India's Federal System. The Finance Commission, Planning Commission, Inter-State Council, and National Development Council are a few important institutions that act as intermediates among the central, state, and local governments and oversee financial relations between states and centre. Since 1918, when the Montague Chelmsford reforms were implemented, efforts to define the roles of the central and state governments have been made. The Government of India Act of 1935, on the other hand, clearly defined the roles of the two levels of government, and in many ways, the current constitutional assignments are very similar to it. The powers and duties of the federal government and the states are listed in the Constitution's 7th Schedule (Union List, State List, and Concurrent List).

Financial structure imbalances are the most typical phenomenon. There are typically two kinds of financial imbalances discussed. Vertical fiscal imbalance refers to imbalances at different levels of the government (inter-governmental), whereas horizontal fiscal imbalance refers to imbalances at different units of the same level of government (inter-jurisdictional). The constitutional assignment would create imbalances at the state level between revenue capacities and expenditure requirements in India. The Constitution of India stipulates that grants from the consolidated fund of India are made to the States and that certain centrally imposed taxes' proceeds are divided among the States. Articles 268 and 269 permit the Centre to levy and collect certain taxes, but the States are to receive all of the revenues.

Prior to the 80th amendment, the States shared revenue from taxes on non-agricultural incomes and union excise duties. The Constitution also acknowledges that the States' tax powers are insufficient to meet their expenditure requirements. As a result, it provides for the sharing of revenues from central taxes. According to the recommendations of the 10th Finance Commission, all central taxes have been merged into a divvy-up pool as a result of the aforementioned constitution amendment, and each central tax must be divided equally among the states. Article 275 of the Constitution makes grants of assistance to the States in addition to tax devolution. The Finance Commission must determine Grants in Aid and tax devolution. The 11th Finance Commission established an indicative ceiling for total revenue transfers for the first time, taking into account grants recommended by the Commission, grants for plans, and other grants. The 12th Finance Commission, like the 11th Finance Commission, has been asked to look at the state of the Union's and the States' finances and come up with a plan to restructure public finances in order to restore budget balance, maintain macroeconomic stability, reduce debt, and achieve equitable growth.

When delegating taxing authority to different governments, four general principles must be taken into account. First, the Economic Efficiency Criterion says that the central government should collect taxes on mobile factors and tradable goods that affect how well the internal common market works. Second, considerations of national equity call for the central government to receive progressive redistributive taxes. This prevents regional and local governments from employing perverse redistribution policies that use both taxes and transfers to entice people with high incomes and dissuade those with low incomes. Thirdly, the Administrative Feasibility Criterion, which seeks to reduce administrative expenses, recommends that taxes be distributed to the jurisdiction that possesses the greatest capacity for monitoring pertinent assessments. Fourth, the Fiscal Need or Revenue Adequacy Criterion suggests that in order to guarantee accountability, expenditure requirements and revenue sources ought to be as closely aligned as possible. According to a number of studies, fiscal imbalances in India have increased, particularly since economic reforms were implemented. Analyzing the proportions of Central and State governments in terms of revenues and expenditures would be interesting in this setting.