Federal Finance System in India
The nature of a financial system in a country is determined by the prevailing political system. India has a federal form of government, and hence the federal finance system. The essence of the federal form of government is that the Central and State Governments should be independent of each other in their respective, constitutionally demarcated, sphere of action. The Constitution should spell out distinctly and separately the functions to be performed by respective Governments.
Once the functions of the Governments have been neatly spelled out, it becomes equally important that each of the Governments should be provided with competent sources of raising adequate revenue to discharge the functions entrusted to it.
For the successful operation of the federal form of government, two important conditions are:
- Each of Government should have independent sources of revenue over which it should possess absolute, unrestricted power
- Each Government should have command over adequate resources to meet its needs.
The evolution of the finance system in India can be traced to the Government of India Act, 1935. This Act was based on the general principle of financial independence for the provinces. The Constitution of Independent India accepted this basic principle of federal finance, and, in addition, tried to achieve the following
( i ) Financial Strong Centre: This has been sought to be a achieved through the follwing measures:
- Powers of concurrent taxation have been avoided
- The Centre has been assigned the more elastic and higher-yielding sources of revenues
- The Centre has been given the subjects of money and banking, currency and coinage and the power to resort of deficit financing
- The Centre has been provided with certain exclusive sources of revenue
- The residuary powers are with the Centre
( ii ) Efficient Allocation of Functions and Financial Powers: The Constitution had divided the various functions into three lists..
- Union List
- State's List
- Concurrent List
Financial powers have, likewise, been divided between the Centre and the States.
( iii ) Provision for Resource Transfer: To this end, the Constitution provides three means..
- Tax-sharing
- Grants
- Loans
( iv ) Flexibility in Resources: Transfers from the Centre to the States are recommended every five years by the Finance Commission. This Commission does not have any set criteria or procedures to go by. It has to make its own choice. This lends flexibility to the system.
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