by Financial federalism refers to the division of financial powers and responsibilities between the central and state governments in India. The Constitution of India lays down the principles of financial federalism and provides for a mechanism for sharing financial resources between the central and state governments.
Constitution of India provides a framework for financial federalism that aims to balance the powers and responsibilities of the central and state governments in managing the financial resources of the country. The Finance Commission plays a crucial role in ensuring a fair and equitable distribution of financial resources between the Union and state governments.
Here are the key details:
- Distribution of tax powers: The Constitution provides for a three-fold distribution of tax powers between the Union and the states. The Union government has the power to levy taxes on income, customs and excise duties, and service tax. The state governments have the power to levy taxes on sales tax, state excise duties, and stamp duties. The Constitution also provides for a concurrent list of taxes, which can be levied by both the Union and state governments.
- Division of financial resources: The Constitution provides for a mechanism for sharing financial resources between the central and state governments. The central government collects taxes and shares a portion of these taxes with the state governments through the Finance Commission. The Finance Commission is a constitutional body that is appointed every five years to make recommendations on the distribution of tax revenues between the Union and state governments.
- Grants-in-aid: The Constitution also provides for grants-in-aid from the central government to the state governments. These grants can be provided for specific purposes like education, health, and infrastructure development. The central government can also provide assistance to states that are facing financial difficulties.
- Fiscal responsibility: The Constitution also lays down provisions for fiscal responsibility. It requires both the central and state governments to maintain fiscal discipline and avoid deficits. The Fiscal Responsibility and Budget Management Act (FRBM) of 2003 is an important legislation that aims to promote fiscal discipline and ensure sustainable debt levels for both the central and state governments.
- Inter-governmental transfers: The Constitution also provides for inter-governmental transfers between the Union and state governments. These transfers can be in the form of loans, advances, or grants-in-aid. The central government can also provide assistance to state governments in times of natural disasters or emergencies.
