- Fiscal Federalism: Fiscal federalism is the distribution of taxation and spending powers across levels of government.
- Fiscal federalism is often associated with three broad principles:
- Fiscal Equivalency: It requires a separate jurisdiction for each public service which should include the set of individuals that consume it.
- Decentralization theorem: Each public service should be provided by the jurisdiction having control over the minimum geographic area that would internalise the benefits and costs of such provision.
- Principle of Subsidiarity: Functions should be performed at the low level of government, implying hierarchy.
Constitutional Provisions defining India’s Fiscal Federalism Arrangement
- Seventh Schedule: Constitution delineates tax bases between the Union and States listing them in the Union List and the State List respectively (Article 246).
- Distribution of Revenue: A classification of tax revenues between the union and the states:
- Taxes levied and collected by the centre, but wholly assigned to the states (Article 269).
- Levy and Collection of Goods and Services Tax (GST) in course of Inter-State Trade or Commerce (Article 269-A), which is distributed between Centre and States on recommendations of GST council.
- Taxes levied and collected by the union and distributed between the union and the states (Article 270) on the recommendation of Finance Commission.
- Grants-in-Aid: Centre provides grants-in-aid to states as per Article 275.
- Borrowings: As per Article 292, the union government has powers to borrow money either within or outside the country while under Article 293, a state government can borrow within India (and not abroad).
- Also, if a state is indebted to the Union, it may not resort to further borrowing without the prior consent of the Union Government.
- Finance Commission (FC): Article 280 provides for a Finance Commission (constituted by President after every five years) to adjudicate sharing of resources between Union and States.