![]() Subsequently, the 73rd and 74th constitutional amendments in 1992 added two subclauses, which required the FC to recommend measures needed to augment the Consolidated Fund of a state to supplement the resources of panchayats and municipalities therein on the basis of the recommendations of the state finance commission. They include (i) distribution and allocation of the net proceeds of shareable taxes between the union and states (prior to the 80th constitutional amendment in 2000, this included personal income tax compulsorily and union excise duties, if needed, and thereafter, all taxes) and (ii) principles governing the grants-in-aid of the revenues of states out of the Consolidated Fund of India. The commission’s terms of reference (ToR) are specified in the Constitution under Article 280(3). They also provided for an institutional mechanism in the form of finance commissions (FCs) to facilitate such transfers. The Constitution-makers foresaw these imbalances and provided for instruments in the form of taxes to be shared and grants-in-aid. This gives rise to a horizontal imbalance. Further, the gap between capacity to collect revenue and expenditure needs varies across states depending upon initial endowments, historical backgrounds, and the levels of development. Such imbalances are common to most federations and India is no exception. This eventually results in a vertical imbalance. The social and economic sectors, involving large expenditures, thus, become the responsibility of subnational governments. ![]() In India, the nationwide base and redistributive taxes, money supply, and borrowing powers are assigned to the federal government, while subnational governments, being closer to people, are better placed in local service provisioning. ![]() Fiscal federalism relates to the assignment of functions to different levels of government and of appropriate revenue instruments to carry out these functions based on comparative advantage. ![]()
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