Federal Finance

Federal Finance

Federal finance refers to the system of assigning the source of revenue to the Central as well as State Governments for the efficient discharge of their respective functions i.e. clear-cut division is made regarding the allocation of resources of revenue between the central and state authorities.

Division of Powers: In our Constitution, there is a clear division of powers so that none violates its limits and tries to encroach upon the functions of the other and functions within own sphere of responsibilities. There are three lists enumerated in the Seventh Schedule of constitution. They are: the Union list, the State list and the Concurrent List.

The Union List consists of 100 subjects of national importance such as Defence, Railways, Post and Telegraph, etc.

The State List consists of 61 subjects of local interest such as Public Health, Police etc.

The Concurrent List has 52 subjects important to both the Union and the State, such as Electricity, Trade Union, Economic and Social Planning, etc.

Central State Financial Relationship

(I) Union Sources

1.        Corporation tax

2.        Currency, coinage and legal tender, foreign exchange.

3.        Duties of customs including export duties.

4.        Duties of excise on tobacco and certain goods manufactured or produced in India.

5.        Estate duty in respect of property other than agricultural land.

6.        Fees in respect of any of the matters in the Union List, but not including any fees taken in any Court.

7.        Foreign Loans.

8.        Lotteries organized by the Government of India or the Government of a State.

9.        Post Office Savings Bank.

10.   Posts and Telegraphs, telephones, wireless, Broadcasting and other forms of communication.

11.   Property of the Union.

12.   Public Debt of the Union.

13.   Railways.

14.   Rates of stamp duty in respect of Bills of Exchange, Cheques, Promissory Notes, etc.

15.   Reserve Bank of India.

16.   Taxes on income other than agricultural income.

17.   Taxes on the capital value of the assets, exclusive of agricultural land of individuals and companies.

18.   Taxes other than stamp duties on transactions in stock exchanges and future markets.

19.   Taxes on the sale or purchase of newspapers and on advertisements published therein.

20.   Terminal taxes on goods or passengers, carried by railways, sea or air.

(II) State Sources

1.        Capitation tax

2.        Duties in respect of succession to agricultural land.

3.        Duties of excise on certain goods produced or manufactured in the State, such as alcoholic liquids, opium, etc.

4.        Estate duty in respect of agricultural land.

5.        Fees in respect of any of the matters in the State List, but not including fees taken in any Court.

6.        Land Revenue.

7.        Rates of stamp duty in respect of documents other than those specified in the Union List.

8.        Taxes on agricultural income.

9.        Taxes on land and buildings.

10.   Taxes on mineral rights, subject to limitations impose by Parliament relating to mineral development.

11.   Taxes on the consumption or sale of electricity.

12.   Taxes on the entry of goods into a local area for consumption, use or sale therein.

13.   Taxes on the sale and purchase of goods other than newspapers.

14.   Taxes on the advertisements other than those published in newspapers.

15.   Taxes on goods and passengers carried by road or on inland waterways.

16.   Taxes on vehicles.

17.   Taxes on animals and boats.

18.   Taxes on professions, trades, callings and employments.

19.   Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling.

20.   Tolls.

(III) Taxes Levied and Collected by the union but Assigned to the States (Art.269)

1.        Duties in respet of succession to property other than agricultural land.

2.        Estate duty in respect of property other than agricultural land.

3.        Taxes on railway fares and freights.

4.        Taxes other than stamp duties on transactions in stock exchanges and future markets.

5.        Taxes on the sale or purchase of newspapers and on advertisements published therein

6.        Terminal taxes on goods or passengers carried by railways, sea or air.

7.        Taxes on the sale or purchase of goods other than newspapers where such sale or purchase taxes place in the course of inter-State trade or commerce.

(IV) Duties levied by the Union but collected and Appropriated by the states (Art.268)

Stamp duties and duties of excise on medicinal and toilet preparation (those mentioned in the Union List) shall be levied by the Government of India but shall be collected.

1.        In the case where such duties are leviable within any Union territory, by the Government of India.

2.        In other cases, by the States within which such duties are respectively leviable.

3.        Taxes which are Levied and Collected by the Union but which may be Distributed between the Union and the States (Arts.270 and 272)

4.        Taxes on income other than agricultural income.

5.        Union duties of excise other than such duties of excise on medicinal and toilet preparations as are mentioned in the Union List and collected by the Government of India.

6.        “Taxes on income” does not include corporation tax. The distribution of income-tax proceeds between the Union and the States is made on the recommendations of the Finance Commission.

1. Principles of Federal Finance

In the case of federal system of finance, the following main principles must be applied:

1.        Principle of Independence.

2.        Principle of Equity.

3.        Principle of Uniformity.

4.        Principle of Adequacy.

5.        Principle of Fiscal Access.

6.        Principle of Integration and coordination.

7.        Principle of Efficiency.

8.        Principle of Administrative Economy.

9.        Principle of Accountability.

1. Principle of Independence

Under the system of federal finance, a Government should be autonomous and free about the internal financial matters concerned. It means each Government should have separate sources of revenue, authority to levy taxes, to borrow money and to meet the expenditure. The Government should normally enjoy autonomy in fiscal matters.

2. Principle of Equity

From the point of view of equity, the resources should be distributed among the different states so that each state receives a fair share of revenue.

3. Principle of Uniformity

In a federal system, each state should contribute equal tax payments for federal finance. But this principle cannot be followed in practice because the taxable capacity of each unit is not of the same.

4. Principle of Adequacy of Resources The principle of adequacy means that the resources of each Government i.e. Central and State should be adequate to carry out its functions effectively. Here adequacy must be decided with reference to both current as well as future needs. Besides, the resources should be elastic in order to meet the growing needs and unforeseen expenditure like war, floods etc.

5. Principle of Fiscal Access

In a federal system, there should be possibility for the Central and State Governments to develop new source of revenue within their prescribed fields to meet the growing financial needs. In nutshell, the resources should grow with the increase in the responsibilities of the Government.

6. Principle of Integration and coordination

The financial system as a whole should be well integrated. There should be perfect coordination among different layers of the financial system of the country. Then only the federal system will survive. This should be done in such a way to promote the overall economic development of the country.

7. Principle of Efficiency

The financial system should be well organized and efficiently administered. There should be no scope for evasion and fraud. No one should be taxed more than once in a year. Double taxation should be avoided.

8. Principle of Administrative Economy

Economy is the important criterion of any federal financial system. That is, the cost of collection should be at the minimum level and the major portion of revenue should be made available for the other expenditure outlays of the Governments.

9. Principle of Accountability

Each Government should be accountable to its own legislature for its financial decisions i.e the Central to the Parliament and the State to the Assembly.