Financial Relations Between the Union and States in India: A Brief Commentary
Introduction: India’s federal structure necessitates a complex system of financial relations between the Union (Central) government and the States. The Constitution outlines the division of powers and revenue sources, aiming for a balance between autonomy for states and national unity. However, this arrangement has consistently faced challenges, leading to ongoing debates and adjustments. Article 265 of the Indian Constitution prohibits the Union and the States from levying taxes except as authorized by the Constitution. The distribution of resources is primarily governed by Articles 268, 269, 270, and 280, which deal with the sharing of taxes and the establishment of the Finance Commission.
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1. Sources of Revenue: The Constitution divides tax powers between the Union and the States. The Union government primarily collects taxes on income tax, corporation tax, customs duties, and excise duties on manufactured goods. States primarily collect taxes on sales tax (now GST), stamp duties, land revenue, and state excise duties. The sharing of taxes is a crucial aspect of financial relations.
2. Mechanisms for Resource Transfer: The primary mechanism for transferring resources from the Union to the States is the Finance Commission, a constitutional body established every five years. The Commission recommends the principles governing the distribution of net proceeds of taxes between the Union and the States, and grants-in-aid to States. Other mechanisms include centrally sponsored schemes (CSS), where the Union provides funds for specific projects, and grants for specific purposes.
3. Irritants in Financial Relations: Several issues consistently create friction in the Union-State financial relationship:
- Vertical Imbalance: A significant disparity exists between the resources available to the Union and the States. The Union government, with its access to larger revenue sources, often holds a disproportionate share of resources. This leads to states constantly demanding a larger share.
- Horizontal Imbalance: Disparities also exist among states themselves, with some being richer and others significantly poorer. The current system struggles to adequately address these inter-state inequalities.
- Conditionalities Attached to Grants: Centrally sponsored schemes often come with conditions imposed by the Union government, limiting the autonomy of states in utilizing funds according to their specific needs and priorities. This can lead to resentment and inefficiency.
- Delayed Disbursement of Funds: Delays in releasing funds from the Union to the States disrupt state budgets and hinder development projects.
- Lack of Transparency and Accountability: The complexities of the financial transfer system sometimes lack transparency, making it difficult to track the flow of funds and ensure accountability.
- GST Implementation Challenges: While GST aimed to simplify indirect taxation, it has also introduced new complexities in revenue sharing and compensation mechanisms, leading to disputes between the Union and States.
4. Case Studies and Examples: The debate surrounding the devolution of funds to states under the 14th and 15th Finance Commissions exemplifies the ongoing tensions. Disputes over the sharing of GST revenue and the compensation cess highlight the practical challenges in implementing a unified tax system. Several states have voiced concerns about the inadequacy of funds received through various mechanisms.
Conclusion: The financial relations between the Union and the States in India are crucial for maintaining a balanced federal structure. While the Constitution provides a framework, the practical implementation faces several challenges. Addressing the vertical and horizontal imbalances, enhancing transparency and accountability in fund allocation, streamlining the process of releasing funds, and ensuring greater flexibility in utilizing centrally sponsored schemes are crucial steps. A more collaborative approach, involving greater consultation and dialogue between the Union and States, is essential. Moving forward, a focus on strengthening the institutional mechanisms for resource allocation, promoting fiscal federalism, and ensuring equitable distribution of resources will be vital for fostering inclusive and sustainable development across all states, upholding the spirit of cooperative federalism enshrined in the Constitution.
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