What is Federal Fiscal Relations?
Historical Background
Key Points
8 points- 1.
Division of Taxing Powers: The Seventh Schedule of the Constitution divides legislative powers, including taxation, into Union List, State List, and Concurrent List. The Union has exclusive powers over income tax (excluding agricultural income), customs, excise duties (except on alcoholic liquors and narcotics), etc., while states have powers over land revenue, sales tax (now subsumed under GST), excise on alcohol, etc.
- 2.
Expenditure Responsibilities: Both Centre and States have distinct expenditure responsibilities as per the lists, but also shared responsibilities in areas like social welfare.
- 3.
Grants-in-Aid: The Centre provides grants to states under Article 275 (statutory grants based on Finance Commission recommendations) and Article 282 (discretionary grants for public purposes).
- 4.
Borrowing Powers: The Union government can borrow on the security of the Consolidated Fund of India (Article 292), and states can borrow within India (Article 293), but require central consent if they owe money to the Centre.
- 5.
Finance Commission: Article 280 mandates the President to constitute a Finance Commission every five years to recommend the distribution of net proceeds of taxes between the Union and states (vertical devolution) and among states (horizontal devolution), and principles governing grants-in-aid.
- 6.
Centrally Sponsored Schemes (CSS): Schemes implemented by states but largely funded by the Centre, often leading to debates over conditionalities and state autonomy.
- 7.
Goods and Services Tax (GST): A significant reform that subsumed multiple indirect taxes, requiring a new mechanism for revenue sharing and compensation between Centre and states through the GST Council.
- 8.
Inter-State Disputes: Issues often arise regarding resource allocation, implementation of central schemes, and financial autonomy of states.
Visual Insights
Federal Fiscal Relations in India: Structure & Dynamics
This mind map provides a comprehensive overview of India's federal fiscal relations, covering the constitutional framework, revenue distribution, expenditure responsibilities, and key institutions that govern financial interactions between the Centre and States.
Federal Fiscal Relations in India
- ●Constitutional Framework
- ●Revenue Sources & Distribution
- ●Expenditure Responsibilities
- ●Inter-Governmental Transfers
- ●Key Institutions & Issues
Recent Developments
5 developmentsImplementation of GST and its impact on state revenues and fiscal autonomy.
Increased reliance of states on central transfers and centrally sponsored schemes.
Debates over the terms of reference of Finance Commissions and their recommendations.
Issues of pending dues from the Centre to states for various schemes, often linked to non-compliance with central directives, as highlighted in the news.
Demand for greater fiscal autonomy by states and concerns over the 'quality' of central transfers (tied vs. untied grants).