In recent years, India has witnessed a growing discourse surrounding fiscal centralization, with concerns raised over the concentration of financial power in the hands of the central government. This trend is particularly pronounced in the context of the Goods and Services Tax (GST) regime, where states have expressed apprehensions about their diminishing fiscal autonomy. The allocation of funds and decision-making authority by the central government has come under scrutiny, leading to debates about the fairness and effectiveness of the current fiscal architecture. Critics argue that such centralization not only undermines the principles of federalism but also hampers local governance and development initiatives. Moreover, disparities in fiscal capacities among states exacerbate these concerns, as smaller or less economically developed states may find themselves disproportionately disadvantaged. As India navigates its economic and political landscape, addressing these concerns will be crucial for fostering equitable development and strengthening the fabric of federalism.
Tag: GS – 3 Mobilization of Resources GS – 2 Federalism, Co-operative Federalism
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The article delves into the impact of the Union government’s actions, which diminish the overall financial transfers to the States, on the diminishing strength of fiscal-cum-cooperative federalism in the nation.
Different Provisions Related to Centre-State Financial Relations
- Constitutional Framework (Part XII)
- Provisions in Articles 268 to 293 elaborate on tax and non-tax revenue distribution, borrowing powers, and grants-in-aid.
- Article 275 facilitates discretionary funds transfer from the Union to States.
- Role of Finance Commission (Article 280)
- The Finance Commission recommends tax revenue distribution, enhances state financial resources, and ensures fiscal stability.
- Empowered to address issues in the interest of sound finance beyond tax devolution.
- Taxing Powers Division (Seventh Schedule)
- Division of taxing powers between Parliament and state legislatures.
- Parliament for Union List, states for State List, and Concurrent List shared.
Steps of Union Government Affecting Financial Transfers
- Centralization of Fiscal Powers
- Rise in non-shareable revenues, limiting state fiscal autonomy.
- States advocate for a larger share in all central taxes.
- Erosion of State Tax Autonomy
- Loss of autonomy in setting tax rates due to VAT implementation.
- States face challenges in defining tax policies.
- Constraints on State Expenditure Flexibility
- Conditional and tied grants limit state discretion in fund allocation.
- Grants focus on specific state list items, restricting flexibility.
- Uniform Fiscal Targets
- FRBM Act imposes uniform fiscal targets across states.
- Fails to consider diverse fiscal needs, impacting effective financial management.
- GST Implementation
- Shifts tax burden from manufacturing to consuming states.
- Alters power balance among states in indirect taxation.
Current Scenario of Fiscal Transfers:
- Declining Share in Gross Tax Revenue
- States’ share in gross tax revenue decreases despite FC recommendations.
- Gross tax revenue of Union increases while the share to states declines.
- Reduction in Grants-in-Aid
- Decline in grants-in-aid to states impacts financial transfers.
- Statutory financial transfers’ share in Union gross tax revenue drops.
- Tax Collection Under Cess and Surcharge
- Increasing reliance on revenue collection through cess and surcharge.
- GST cess not considered in the calculation.
- Financial Centralisation Concerns
- Union government retains over 50% of gross tax revenue.
- Limited expenditure responsibilities despite fiscal deficit.
Steps for Better Devolution of Finances:
- Re-Examine Tax-Sharing Principles
- Direct FCs to review tax-sharing principles considering changing fiscal federalism.
- Align terms of reference on indirect tax base consolidation.
- Redesign Statutory Sharing of Indirect Taxes
- Re-examine and redesign vertical and horizontal sharing of indirect taxes.
- Define divisible pool and revisit distribution criteria.
- Calculating and Allocating Cost of Collecting
- Task FCs to recommend methods for calculating and allocating collection costs.
- Propose measures for tax reduction and efficiency improvement.
- Redesign Grant Mechanism
- Redesign CSS and CSS shared schemes based on changing circumstances.
- Examine the need for compensation in post-GST scenarios.
- New Institutional Structure of Federal Finance
- Formally align GST Council and Finance Commission for cohesive decision-making.
- Investigate the role of GST Council as a Fiscal Council during non-operational periods.
Conclusion
The substantial reduction in financial transfers to states poses a threat to cooperative federalism. Despite increased gross tax revenue, state shares have not risen accordingly. The reliance on CSS and CS exacerbates inter-state inequality. Reforms are needed to ensure equitable distribution of financial resources among states and strengthen cooperative federalism.
UPSC Previous Year Questions Prelims (2021) Q. Which one of the following in Indian polity is an essential feature that indicates that it is federal in character? (a) The independence of judiciary is safeguarded. (b) The Union Legislature has elected representatives from constituent units. (c) The Union Cabinet can have elected representatives from regional parties. (d) The Fundamental Rights are enforceable by Courts of Law. Ans: (a) Prelims (2017) Q. Which one of the following is not a feature of Indian federalism? (a) There is an independent judiciary in India. (b) Powers have been clearly divided between the Centre and the States. (c) The federating units have been given unequal representation in the Rajya Sabha. (d) It is the result of an agreement among the federating units. Ans: (d) Prelims (2017) Q. Local self-government can be best explained as an exercise in (a) Federalism (b) Democratic decentralisation (c) Administrative delegation (d) Direct democracy Ans: (b) Prelims (2018) Q. Consider the following items: Cereal grains hulled Chicken eggs cooked Fish processed and canned Newspapers containing advertising material Which of the above items is/are exempted under GST (Good and Services Tax)? (a) 1 only (b) 2 and 3 only (c) 1, 2 and 4 only (d) 1, 2, 3 and 4 Ans: (c) Prelims (2017) Q. What is/are the most likely advantages of implementing ‘Goods and Services Tax (GST)’? It will replace multiple taxes collected by multiple authorities and will thus create a single market in India. It will drastically reduce the ‘Current Account Deficit’ of India and will enable it to increase its foreign exchange reserves. It will enormously increase the growth and size of economy of India and will enable it to overtake China in the near future. Select the correct answer using the code given below: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3 Ans: (a) |
Source: TH
Frequently Asked Questions (FAQs)
Q: What is fiscal centralization, and why is it a concern in India?
A: Fiscal centralization refers to the concentration of financial power and decision-making authority in the central government. In India, it’s a concern because it limits the fiscal autonomy of states and can lead to disparities in resource allocation and development.
Q: How does the Goods and Services Tax (GST) contribute to fiscal centralization concerns in India?
A: The GST regime in India has centralized tax collection and distribution, reducing the fiscal autonomy of states. This centralization has raised concerns about the fairness of resource allocation and the ability of states to address their specific development needs.
Q: What are the implications of fiscal centralization on India’s federal structure?
A: Fiscal centralization undermines the principles of federalism by concentrating financial power at the central level. This can lead to tensions between the central and state governments and hinder effective governance and development at the local level.
Q: How do disparities in fiscal capacities among Indian states exacerbate concerns about centralization?
A: Indian states vary significantly in terms of economic strength and revenue generation capacity. Centralization disproportionately affects smaller or less economically developed states, widening the gap between them and more prosperous states and hindering their ability to address development challenges.
Q: What measures can be taken to address fiscal centralization concerns in India?
A: To address fiscal centralization concerns, India could consider reforms such as greater fiscal decentralization, empowering states with more financial autonomy, revisiting the GST framework to better accommodate state interests, and promoting intergovernmental cooperation to ensure equitable resource distribution and development across the country.
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