What are the principle of federal finance.
What are the principle of federal finance.
Or
Explain the principles governing allocation of resources between federation and the states.
Ans.
Principles of Federal Finance
Principles of federal finance refer to the proper management of the sources of income and heads of expenditure between central and state governments. Prof. B. P. Adarkar, in his famous book, Principles and Problems of Federal Finance, has described the following principles of federal finance-
(1) Principle of Independence and Responsibility: According to Prof. Adarkar, every government (central, state and local) of a federal state should be fully independent in matters of its internal financial affairs. By it he means that every government should have the right to get income as per its own requirements. For it, the state should be given the rights by which they can get revenue through taxation within their territorial jurisdiction. If they fail to meet their requirements by this revenue, they should also be free to raise public loans. Different governments should also have the right to spend their respective incomes as per their desire. The central and the state governments should be free within their own spheres, and they should not interfere with one another’s affairs. Both of them should fulfil the responsibility regarding their taxation policy, debt policy and expenditure policy. For example, income tax in India falls under the scope of the central government, the states do not at all interfere with it. Similarly, the entertainment tax falls under the purview of the state governments, the centre does not interfere with it in any way. Thus, in both these areas, the respective governments are independent, and both of them fulfil their respective responsibilities.
(2) Principle of Adequacy and Elasticity: This principle implies that every government should have enough sources of income by which the functions assigned to them should be completed. The central and the state governments must get, at least, that much sources of income that they are not only able to meet the present needs, but also are capable of meeting their future needs. Besides, the sources of income should be elastic so that changes as per the requirement can be made in them.
(3) Principle of Administrative Efficiency: According to Prof. Adarkar, federal finance should be based on the principle of administrative efficiency. This means that (i) too much expenditure should not be incurred on collecting tax revenue, (ii) no tax evasion should take place, (iii) maximum administrative capability should be there in the process of tax collection, (iv) there should be no possibility of double taxation, (v) the Inter-State taxes should be managed by the central government, and the taxes of regional nature should be managed by the state governments.
These above mentioned three principles of federal finance have been propounded by Prof. Adarkar. Besides these, some other principles of federal finance are as follows:
(4) Principle of Uniformity: The central government should pursue a uniform policy towards all states regarding the economic burden and benefits. The centre should follow the policy of equal responsibility and equal welfare towards every state. If more facilities are given to some states, other states will be dissatisfied, assuming it to be a discriminatory policy. As far as possible, central government should follow a uniform policy regarding the tax- revenue and the distribution of sources towards all the states.
(5) Principle of Transference/Balanced Development: According to this principle, it is essential, from the point of view of maintaining a minimum living standard for all the citizens, that the central government collects money from the rich states and distributes it among the poor states. The ideal distribution of the sources of the federation and those of the states should be based on the principle of “National Minimum” for the people living in different states. In a federal state, it is Wade possible by transferring the finance from affluent states to poor states i.e. people of all the states should be able to meet minimum basic needs. The basic reason of all those transfers is to remove interstate inequalities.
(6) Principle of Mutual Relations and Co-ordination: The financial system of various states should be based on the principle of mutual relations and co-ordination. This co-ordination should not be restricted to taxation alone; rather, it should be extended to the public expenditure, current budget, capital expenditure, etc.
In brief, there are several important principles of federal finance. But these principles keep changing from time to time. Our viewpoint regarding federal finance should not be limited only to these principles, but we should go on making changes in these as per the circumstances.
