Table of Contents:
- Indian Constitutional Articles related to the Finance Commission
- What are the functions of the finance commission? Examine its emerging role in Fiscal Federalism. ( UPPSC 2020)
- Describe the financial relations between the center and states in India. ( UPPSC 2021)
- Critically examine the role of the Finance Commission in the Centre-State financial relations. ( UPPSC 2022)
- How have the recommendations of the 14th Finance Commission of India enabled the states to improve their fiscal position? (UPSC 2021)
Indian Constitutional Articles related to the Finance Commission:
The Finance Commission of India is a constitutional body established under Article 280 of the Indian Constitution. Its primary role is to recommend the distribution of financial resources between the central government and the state governments in India. The recommendations of the Finance Commission are crucial in determining the sharing of tax revenues and grants-in-aid between the central and state governments, which helps maintain fiscal federalism in India. The Finance Commission is typically appointed every five years and submits its reports to the President of India.
Some key articles related to the Finance Commission include:
Article 280:
Article 280 establishes the Finance Commission as a constitutional body and outlines its composition, functions, and duties.
Article 281:
Article 281 deals with the recommendations of the Finance Commission.
Article 282:
Article 282 allows the President to make grants-in-aid to states for specific purposes as recommended by the Finance Commission.
Article 283:
Article 283 deals with the custody, payment, and withdrawal of funds from the Consolidated Fund of India for the purposes recommended by the Finance Commission.
These articles of the Indian constitution collectively define the role, responsibilities, and financial powers of the Finance Commission in India's federal system of governance.
Question.
What are the functions of the finance commission? Examine its emerging role in Fiscal Federalism.
( UPPSC Mains General Studies-II/GS-2 2020)
Answer.
The Finance Commission in India is a constitutional body mandated under Article 280 of the Indian Constitution. Its primary function is to recommend the distribution of financial resources between the Union government and the state governments and among the states.
The Finance Commission plays a crucial role in promoting fiscal federalism by ensuring a fair and equitable distribution of resources and fostering cooperation between the different levels of government.
Here are the key functions of the Finance Commission:
Resource Distribution:
The primary function of the Finance Commission is to recommend the sharing of central tax revenues between the Union government and the state governments. It determines the vertical devolution of money, i.e., the share of tax revenue that goes to the states.
Horizontal distribution:
The Finance Commission also recommends the distribution of resources among the states. It takes into account factors such as population, income levels, and fiscal needs of each state to allocate resources in a way that addresses regional imbalances.
Grants-in-Aid:
The Finance Commission suggests the quantum of grants-in-aid that the Union government should provide to the states. These grants aim to support states' development and welfare efforts and are provided by the Consolidated Fund of India.
Fiscal Consolidation:
The Commission examines the finances of the Union and state governments and suggests measures for fiscal consolidation, revenue generation, and fiscal discipline.
Tax Measures:
The Finance Commission may propose tax measures to enhance revenue and efficiency in tax administration, both at the central and state levels.
Incentives and Disincentives:
The Commission can recommend incentives and disincentives to encourage states to adopt specific policy measures that are in line with national priorities, such as population control or fiscal responsibility.
Emerging Role in Fiscal Federalism:
The Finance Commission's role in fiscal federalism has evolved over the years to address contemporary challenges. Some aspects of its emerging role include:
Addressing Dynamic Demands:
The Finance Commission must consider changing economic and demographic realities while recommending resource distribution. It aims to provide a balance between the needs of fast-growing states and those facing development challenges.
Strengthening Local Governance:
The Commission recognizes the importance of local governments and allocates resources to strengthen their capacity for service delivery and governance.
Performance-Based Incentives:
The Commission has introduced performance-based incentives to reward states that achieve specific development and governance outcomes, promoting healthy competition among states.
Cooperative Federalism:
The Commission's consultations with state governments and stakeholders foster cooperative federalism, involving states in the decision-making process and ensuring a more consultative approach to resource distribution.
In conclusion, the Finance Commission plays a critical role in fiscal federalism by recommending the distribution of financial resources between the Union government and the states.
Its emerging role emphasizes addressing dynamic demands, strengthening local governance, promoting cooperative federalism, and incentivizing performance-based outcomes.
Through its recommendations, the Finance Commission aims to foster a balanced and cooperative fiscal relationship between the Union and the states, supporting India's federal structure and equitable development.
Question.
Describe the financial relations between the center and states in India.
( UPPSC Mains General Studies-II/GS-2 2021)
Answer.
The financial relations between the Centre (Union Government) and the States in India are governed by the provisions outlined in the Constitution of India. These financial relations are crucial for the functioning of the federal structure of the country. The financial arrangement ensures a balanced distribution of resources, revenue, and responsibilities between the Union and the State governments.
Here are the key aspects of the financial relations between the Centre and States in India:
Finance Commission:
The Constitution mandates the formation of a Finance Commission at regular intervals to recommend the distribution of financial resources between the Centre and the States. The Finance Commission reviews factors like population, income disparity, fiscal capacity, and the need for development while recommending the sharing of central tax revenues with States.
Distribution of Tax Revenue:
The Constitution divides the power to levy and collect taxes between the Centre and the States. Some taxes, such as income tax, customs duties, and central excise duties, are exclusively levied and collected by the Union Government. On the other hand, States have the authority to collect taxes on items like stamp duties, and entertainment taxes.
Borrowing Powers:
Both the Centre and States have the power to borrow funds, but there are certain limitations on the States' borrowing capacity. The Centre sets the limits on State borrowing to ensure fiscal discipline and financial stability.
Goods and Services Tax (GST):
Goods and Services Tax (GST) was introduced in 2017. The GST is a comprehensive indirect tax that replaced several taxes levied by the Centre and the States. It is a destination-based tax, and revenue is shared between the Centre and States based on a formula recommended by the GST Council.
Finance Commission Grants:
The Finance Commission also recommends grants to States to address specific issues or developmental challenges. These grants include grants for local bodies, disaster management, and revenue deficit grants.
The financial relations between the Centre and States in India are dynamic primarily through the recommendations of Finance Commissions. These arrangements aim to ensure fiscal autonomy for the States while allowing the Centre to coordinate national-level planning and resource allocation for overall development.
The financial collaboration and cooperation between the two tiers of government are essential for maintaining a balanced and cohesive federal system in India.
Question.
Describe the financial relations between the center and states in India.
( UPSC Mains General Studies-II/GS-2 2021)
Answer.
The recommendations of the 14th Finance Commission of India, which covered the fiscal years from 2015-16 to 2020-21, played a significant role in improving the fiscal positions of the Indian states in several ways:
Increased Share of Central Taxes:
The 14th Finance Commission recommended a substantial increase in the share of states in the divisible pool of central taxes. The states' share was raised from 32% to 42%, providing them with a larger portion of central tax revenue. This increase in revenue allowed states to have more resources for their development programs.
Greater Fiscal Autonomy:
With a higher share of central taxes, states gained greater fiscal autonomy and flexibility in managing their finances. They had more control over their revenue sources, reducing their dependence on central grants.
Grants for Local Bodies:
The 14th Finance Commission also recommended grants to rural and urban local bodies, strengthening local governance and decentralization of funds. This empowered local governments to undertake development initiatives and provide essential services.
Incentives for Fiscal Discipline:
The Commission introduced incentives for states to improve their fiscal discipline. It encouraged states to reduce their revenue deficits and adopt measures for fiscal consolidation, leading to better financial management.
Inclusive Growth:
The recommendations of the 14th Finance Commission aimed to promote inclusive growth by considering parameters like population and fiscal needs, which benefited states with larger populations and greater development challenges.
Enhanced Resource Mobilization:
States were encouraged to mobilize additional resources through measures like increasing their own tax revenue and improving the efficiency of tax collection.
Overall, the 14th Finance Commission's recommendations empowered states with increased financial resources and greater fiscal autonomy.
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