Home Governance Know the importance of fiscal federalism in India

Know the importance of fiscal federalism in India

Since inception, Indian fiscal federalism underwent numerous amendments and revolutions. GST was incorporated in 2017 to streamline India’s indirect tax structure as a measure to promote cooperative federalism in India, giving the states an increased role in formulating and implementing the overhauled taxation system

New Delhi, April 21, 2021: The Government of India Act 1919 and 1935 laid out the tenet of fiscal federalism and revenue sharing between the Centre and the states, in order to improve political, economic and administrative efficiency, and grant increased autonomy to the provinces of India.

What is fiscal federalism?

Since inception, Indian fiscal federalism underwent numerous amendments and revolutions.

The 14th Finance Commission chaired by Dr. Y V Reddy, recommended a historic 42 percent devolution of revenue to the states, the highest ever till date.

Goods and Services Tax (GST) was incorporated in 2017 to streamline India’s indirect tax structure as a measure to promote cooperative federalism in India, giving the states an increased role in formulating and implementing the overhauled taxation system.

The NITI Aayog established in 2015 ‘was expected to address new realities of macroeconomic management that were missed by the Planning Commission’.

fiscal-federalism-Utkal-Today
Image: Utkal Today

Main concepts of fiscal federalism

Fiscal Federalism stands for the division of responsibilities with regards to public expenditure and taxation between the different levels of the government.

Having a fiscal federalism mechanism allows the government to control and check their costs on economies of scale, because in this manner, people will get public service which they prefer, and there will be no unnecessary expenditure.

In the economic dimensions, having a fiscal federalism implies greater chances at a unified market.

Article 246 of the Indian constitution carries three lists demarcating the subjects on which different levels of government can make laws. The Union can make laws relating to the subject matter given under list I.

The Sates has the authority to make laws relating to subjects given under list II, and list III, also known as the Concurrent List, allows both the Union and the States to make laws, relating to subjects provided by the list.

The subject of taxation is also included in the three lists. The Union List (I) includes taxes like Customs and Excise duties, Corporation Tax, taxes on income other that agricultural income, etc.

List II includes taxes like taxes on vehicles, taxes on liquors, land revenue, taxes on stamp duties, taxes on entertainment and luxuries, taxes on sale or purchase of goods, etc. (List III, or the Concurrent List does not contain any major tax as such).

The Indian constitution rules out provisions for the smooth coherent functioning of the Union and the States and to levy and collect taxes through systematic arrangement of taxes like those levied and collected by the Centre but assigned to the State, those levied by the Centre but collected and kept by the States.

It guides the sharing of proceeds of income from some taxes. It lays down a grant-in-aid provided by the Centre to the States and grants provided for any public purpose.

Also Read: Providing districts an extra boost with the Aspirational Districts Programme

Goals

The new generation of scholars of federalism and fiscal federalism point out that over time the theory of fiscal federalism has evolved considerably. The goal of modern fiscal federalism is not just to ensure the efficient allocation of resources, but also to protect liberty and restrain the power of government, to share legislative and fiscal competencies, to foster political participation and preserve markets.

Therefore, division of the powers of levying and collecting tax between the Centre and the state, ensures that the States get to share the resources which were previously accumulated by the Centre.

Any amendment of the list through which the States and the Centre derive their power of regulating the taxation system is governed by Article 368 of the Constitution.These amendments require the consent of at least half of the State Legislatures. But if any provision of Part XII of the Constitution is to be amended it can be done by invoking Article 368 (2) which requires the consent of only 50 % members of each House of the Parliament, and therefore, the share which the States are entitled to can be altered by the Parliament.

Fiscal Federalism ensures that the government is strengthened at solving problems pertaining to the just distribution of income, efficient and effective allocation of resources, and economic stability. 

Written by: Arpita Patro 

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