Analyze the financial agreements between the Union and the States, taking into account the Finance Commission’s function, the stipulations for tax revenue sharing, and the arguments for and against fiscal federalism.
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The financial arrangements between the Union and the States in India are governed by the Constitution, which provides for a system of federal finance that is based on the principles of cooperation and sharing of resources. The main provisions for sharing of tax revenues are as follows:
Taxes levied and collected by the Union:
Customs duty, excise duty, and service tax are levied and collected by the Union government.
These taxes are shared with the States through the Finance Commission.
Taxes levied and collected by the States:
Income tax, sales tax, and stamp duty are levied and collected by the States.
These taxes are retained by the States.
Shared taxes:
Taxes such as value-added tax (VAT) and central sales tax (CST) are shared between the Union and the States.
The Finance Commission is an independent body that is set up every five years to review the finances of the Centre-State relations. The Commission’s main responsibilities include:
Allocation of Union taxes: The Commission recommends how to allocate Union taxes between the Centre and the States.
Grants-in-aid: The Commission recommends grants-in-aid to be provided by the Centre to the States for specific purposes.
Recommendations for tax reforms: The Commission provides recommendations for tax reforms to improve the fiscal federalism in India.
Debates surrounding fiscal federalism in India include:
Centre-State imbalance: The Centre has more powers to levy taxes and collect revenue, which leads to an imbalance in fiscal resources between the Centre and the States.
Dependence on grants: Many States depend heavily on grants from the Centre, which can create dependence and undermine their financial autonomy.
Tax autonomy: There is a debate about whether States should have more tax autonomy to decide on their own taxation policies.
Fiscal responsibility: There is a need for a more stable and predictable fiscal framework to ensure that both the Centre and the States manage their finances responsibly.
Decentralization: There is a debate about whether decentralization of power and resources would lead to more effective governance and better allocation of resources.
Recent developments:
The 14th Finance Commission (2015-2020) recommended a significant increase in devolution of taxes to States, but also introduced a new formula for sharing taxes that took into account factors such as population, area, and poverty levels.
The GST (Goods and Services Tax) Act, 2017, introduced a new indirect tax regime that replaced multiple state-level taxes with a single national tax. This has led to an increase in revenue for both the Centre and the States.
The 15th Finance Commission (2020-2025) has recommended further devolution of taxes to States, with a focus on promoting fiscal responsibility and accountability.
In conclusion, the financial arrangements between the Union and the States in India are complex and evolving. While there are debates surrounding fiscal federalism, recent developments have aimed to promote greater devolution of powers and resources to States, while also ensuring fiscal responsibility and accountability at all levels of government.