Centre-State Distribution
The distribution of finances between the central and state governments in a federal system like India is a crucial aspect of fiscal federalism. India follows a federal system of government where both the central (Union) government and the state governments have their own sources of revenue and financial responsibilities. The distribution of finances involves several components and mechanisms:
Division of Tax Revenue:
- The Constitution of India divides the taxing powers between the central and state governments. Taxes are categorized into three lists: Union List (central government’s exclusive domain), State List (state government’s exclusive domain), and Concurrent List (both central and state governments can levy these taxes).
- The taxes collected by the central government under the Union List, such as income tax and customs duties, are exclusive to the central government. Taxes collected by the state governments under the State List are for their exclusive use.
Distribution of Grants:
- The central government allocates grants-in-aid to state governments to support specific programs, schemes, and development activities. These grants include:
- Statutory Grants: These are determined by the Finance Commission and are a constitutional requirement.
- Discretionary Grants: These are provided at the discretion of the central government.
- The central government allocates grants-in-aid to state governments to support specific programs, schemes, and development activities. These grants include:
Finance Commission:
- The Finance Commission is a constitutional body that is appointed every five years to recommend the distribution of central tax revenue and grants to state governments. It also addresses other financial matters between the central and state governments.
Resource Sharing:
- The central government shares certain resources with the state governments, such as revenue from central public sector enterprises, the share of central taxes, and other funds.
State’s Own Revenue:
- State governments have their sources of revenue, including state taxes, excise duties, and fees collected within their jurisdiction.
Balancing of Responsibilities:
- The distribution of finances aims to balance the responsibilities and roles of both the central and state governments. While the central government often handles defense, foreign affairs, and national infrastructure, state governments are responsible for local infrastructure, education, healthcare, and law and order.
The Finance Commission in India, established under Article 280 of the Indian Constitution, is a constitutional body responsible for making recommendations on the distribution of finances between the central government (Union) and state governments. It plays a crucial role in ensuring fiscal federalism and financial cooperation between the different tiers of government in India.
Key functions and features of the Finance Commission (as per Article 280 of the Constitution) include:
Distributing Central Tax Revenue: The primary role of the Finance Commission is to recommend the distribution of certain central taxes, like income tax, among the states and the central government. It assesses the needs and fiscal capacity of each state and determines the share of central tax revenue allocated to them.
Allocation of Grants: In addition to tax revenue sharing, the Commission recommends grants-in-aid to states for specific purposes. These grants are provided by the central government to support state-level development and meet local financial requirements.
Fiscal Transfers: The Finance Commission ensures that fiscal transfers are made to states based on a fair and equitable formula, taking into account factors like population, geographical area, tax efforts, and special characteristics of each state.
Recommendations on Fiscal Consolidation: The Commission provides advice on fiscal consolidation, which includes measures for increasing revenue and reducing deficits for both the central and state governments.
Review of the Finances: Periodically, the Finance Commission reviews the finances of the central and state governments and offers suggestions to improve their financial management.
Special Provisions: The Commission can make specific provisions for particular states based on their unique circumstances, such as hilly and difficult terrain, tribal populations, and revenue deficits.
Five-Year Term: The Finance Commission is constituted every five years. Each new Commission is tasked with making recommendations for the fiscal period following its appointment.
President’s Approval: The recommendations of the Finance Commission require the approval of the President of India before they are implemented.
The Finance Commission plays a pivotal role in ensuring the equitable distribution of financial resources among states and helps in maintaining fiscal stability and economic growth across the country. Its recommendations are based on objective criteria and assessments, taking into account the evolving financial needs of both the central and state governments.
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