Constitutional and Structural Foundation
- Constitutional Specification of Revenues: The Constitution clearly specifies sources of revenue for each level of government to safeguard its financial autonomy.
- Power to Raise Resources: Both the Union and State Governments possess independent powers to raise resources by levying taxes in order to carry out governance and execute assigned responsibilities.
- Independent Authority: Under the federal framework, states are not mere administrative agents of the Union; their powers and financial competence are derived directly from the Constitution.
- Part XII of the Constitution: The formal framework covering financial matters—titled “Part XII: Finance, Property, Contracts and Suits”—is placed separately within the constitutional architecture.
Fiscal Federalism and the Dual Tax Structure
- Division of Responsibilities: India functions under a federal structure where both levels of government have distinct constitutional duties that necessitate mobilizing financial resources.
- Constitutional Amendment (2016): The Indian Constitution was amended to empower both the Union and State Governments simultaneously to enact laws for imposing the Goods and Services Tax (GST).
- Dual GST Alignment: A dual GST framework was adopted to conform with the constitutional mandate of fiscal federalism, allowing concurrent taxation on a shared base:
- CGST (Central GST): Levied and administered by the Central Government, forming central revenue.
- SGST (State GST): Levied and administered by the respective State Governments, accruing directly to state exchequers.
- IGST (Integrated GST): Administered by the Centre on inter-state supply and imports, with revenues divided between the Centre and States at specified rates.
- State Taxation Autonomy Post-GST: States retain specific independent taxing powers, such as levying State VAT on alcoholic liquor for human consumption, while five petroleum products remain outside GST temporarily.
Intergovernmental Fiscal Transfers and Resource Flows
- Tax Revenue Devolution: Revenue receipts in Union budget documents explicitly account for tax revenues net of states’ share, reflecting constitutional sharing of tax proceeds with the states.
- Grants-in-Aid: The Central Government provides direct revenue grants to state governments and other entities, which may be allocated for operational expenses or asset creation.
- Loans and Advances (Capital Outflow): Central expenditure includes loans and capital advances disbursed to State and Union Territory governments.
- Assistance for State Plans: Central budget expenditure accounts for central plan assistance dedicated to supporting State and Union Territory development plans.
Fiscal Management and Borrowing Dynamics
- Fiscal Deficit Financing: The Union’s gross fiscal deficit incorporates net borrowing at home, loans from abroad, and borrowings from the Reserve Bank of India (RBI).
- Legislative Framework (FRBMA, 2003): While the central Fiscal Responsibility and Budget Management Act (FRBMA) directly governs Union deficit targets, 26 states have enacted separate state-level fiscal responsibility legislations, standardizing rule-based fiscal discipline across tiers.
- Three-Tier Financial Devolution: Following the 1992 constitutional amendment, State Governments are mandated to devolve powers and share revenues with local bodies (Panchayati Raj and Municipalities).
Reference NCERT PDF Documents
https://ncert.nic.in/textbook/pdf/hess301.pdf
https://ncert.nic.in/textbook/pdf/gees110.pdf
https://ncert.nic.in/textbook/pdf/jess402.pdf
