Briefly describe the different stages of the development of federal finance

Briefly describe the different stages of the development of federal finance in India.

What is the meaning of federal finance ? Define allocation of resources between centre and state.

Discuss the existing financial relation between central and state government in India.

Examine the centre state financial relations in India.

Ans.

Introduction and Meaning of Federal Finance

There may be Unitary form of government or Federal form of government in a country. Similarly, the financial system may also be (i) Unitary Finance and (ii) Federal Finance. In the unitary finance system, only the central government spends on all the items of expenditure in the country, and the revenue from all the sources also goes into the central government’s exchequer. On the other hand, in a federal system of finance, all items of revenue and expenditure are divided among the central, state and the local governments. All the three forms of government, are free to make expenditure on their respective heads and to get revenue from their respective sources.

In the words of Dr. R.N. Bhargawa, “Federal Finance means the finance of the central government as well as the state governments and the relationship between the two.”

Thus, federal finance implies the finance in which the sources of income and expenditure are distributed among the – (i) Central government, (ii) State governments and (iii) Local governments, according to the provisions of Constitution. The financial system of India is Federal. The meaning of federal finance can be comprehended with the help of its following characteristics –

(1) In the Federal finance, the sources of income and heads of expenditure are distributed between the central and state governments according to the Constitution. Their jurisdiction and rights are clearly defined in the Constitution.

(2) In the federal finance, the sources of income and heads of expenditure of the central and the state governments are different. The states are also financially aided by the centre.

(3) Although the state governments have administrative autonomy, yet they remain subordinate to the centre. No state is free to fall apart from central government on its own.

(4) In case of any financial dispute arising between the central and the state governments, the solution thereof is sought according to the constitutional provisions.

Federal Finance in India

India is a federal country as per its constitution. In it, the central, provincial or state and local governments are functioning. Thus, Indian financial system is a federal system. With regard to the distribution of the financial resources between the central and state governments almost all the features of the Government of India Act, 1935, have been incorporated in the Indian Constitution. In this Act, a clear demarcation was made between functions and major sources of central and state governments.

Financial Adjustment in India

(Allocation of Resources between Centre and States)

A clear mention regarding the financial powers of the centre and the states has been made in the Indian Constitution, In it, the allocation of taxes between the centre and state has been made in three parts-(i) Central List, (ii) State List, (iii) Concurrent List. In the Central List, all those taxes which only the central government can levy are included. In the State List, those taxes which the state governments can levy are included. In the Concurrent List, the sources of taxes have not been mentioned. Regarding the areas in this list, the Parliament and the state assemblies can jointly make laws. The sources of income of centre and states and their allocation between them is as follows-

(1) Central Sources: According to the Constitution, 12 sources of income have been reserved for the central government. These taxes are as follows-(i) Income Tax excluding the agricultural income (ii) Excise Duty excluding narcotics (iii) Custom Duty (iv) Corporation Tax (v) Wealth Tax (vi) Estate Duty (vii) Central Sales Tax (viii) Interest Tax (ix) Tax on the transactions of the Stock Exchange and other speculative markets (x) Gift Tax (xi) Advertisement Tax (xii) Service Tax. [Now Estate Duty, Interest Tax and Gift Tax have been abolished by the central government.)

It should be kept in mind that total revenue obtained from items included in Central List does not remain with central government. The revenue collected from central taxes is divided in four parts –

(i) Taxes which accrue wholly to the Central Government: Among these taxes Corporation Tax, Customs Duty, etc. were included. No portion of the total proceeds collected through these taxes was transferred to the state governments. But with the 80th constitutional amendment in year 2000, now all central taxes have become shareable between centre and states. So now corporation tax and custom duties have also become divisible between centre and states.

(ii) Taxes levied by the Centre, but which are shared with the states: As per Indian Constitution, Income tax is levied by the centre and the revenue thus collected is distributed between the centre and the states. Similarly, Central Excise Duty is levied by the centre but the revenue collected is distributed between the centre and the states.

(iii) Taxes levied by the Centre, but given to the States: Among these taxes Wealth Tax and Estate duty, etc. are included. These taxes are levied by the central government, but the entire revenue collected from these taxes is given to the states.

(iv) Taxes levied by the Centre, but collected by the States: Among these Taxes on Medicines and Cosmetics, etc. are included. The central government determines these taxes but they are collected by the state governments and used by them.

(2) States’ Sources: The state governments can impose taxes on 19 items. These are as follows- Succession and estate duties on agricultural land, Land Revenue, Stamp Duty, Agricultural Income Tax, Excise Duty on Narcotics and Alcoholic Liquors, Value Added Tax, Building Tax, Electricity Duty, Motor Vehicle Tax, Entertainment Tax, Road Transport Tax, etc.

(3) Other Sources: The other sources of funds of centre and states are as follows-

(i) Surcharge : According to Article 271 of the Constitution, the Parliament has been empowered to impose surcharge on Income Tax and Excise Duty in order to augment the income of the centre. The revenue thus collected goes only to the centre. It is not divisible.

(ii) Profession Tax : State governments can impose Profession Tax on profession or occupation. The income thus received is kept by the states only. The maximum ceiling of this tax has been raised to Rs. 2,500 per annum. Now profession tax has been abolished by the government.

(iii) Grants-in-Aid: It is a major feature of federal system of government in Indian Constitution. The arrangement of these aids has been made so that the level of economic equality can be attained and the development opportunities be provided to backward states. The decision regarding the extent of the grants and the states deserving these grants has been left to Finance Commission.

(iv) Borrowing: As per Article 292 of Indian Constitution, it has been maintained that the government of India can borrow money on the security of the Consolidated Fund of India. Similarly, in Article 293, it has been maintained that the state governments can also borrow money. The borrowing capacity of the central government is greater than that of the state governments. State governments borrow even from the central government. Thus, both the central and the state governments have the power to borrow money.