Definition of Fiscal Federalism
It is concerned with the division of economic responsibilities between the Central and State and local govt.
Meaning of Fiscal Federalism
The govt can classified as :
a) Unitary system - All the governing power resides in a centralized govt. eg: UK
b) Federal system - The power to govern is shared between central, state and local govt.( Fiscal decentralization) eg: India
Key Issues in Fiscal Federalism
1 Division of responsibilities and resources-
Who makes the decisions about the programmes? Who pays for the programme?
involves financing, regulation and administration
Central govt. provide public goods like defence
2 Regulation-
Constitution restricts state and local govt
state and local govt subject to pollution and env regulations which apply to private firms
3 Incentives for resource transfer-
Central govt. grants and loans to state- leads to disparity in allocation
Types of transfer- Conditional & unconditional
4 Tax expenditure-
Sharing of central tax revenues with the states
5 Tax competition-
Local govt. use tax incentives to attract business- gains in one locality at the expense of losses in other
6 National and local Public goods-
eg: national defence benefits to all
eg: traffic lights benefits to particular locality
Not pure public goods.
7 Tax subsidies-
leads to increased expdt on publicly provided goods and increased capital invst
inefficient due to: wealthy investors, business, discriminate strong preference
8 Fiscal imbalance-
lack of harmony between functions and financial resources
mechanism to even out shortages and surpluses
FISCAL FEDERALISM IN INDIA
A] Division of functions
countrywide tasks to centre and state whereas local imp. to municipalities and panchayats
CG:development functions and non development
SG:development functions and non development
Jurisdiction:
defence uniformly
benefits economies of scale
foreign trade require national agenda
agriculture region to region
Problems:
overlapping -education and health
centrally sponsored schemes dont benefit targeted groups
B] Division of resource raising powers
Receipts of CG: Revenue receipts( taxes on income, property, commodities) non tax and capital receipts( IMF)
Receipts of SG: Revenue receipts ( tax on agri, profession, capital) non tax and capital receipts ( loans)
Criterion for division of tax powers: depends on
tax base- personal income
production- union excise duty, sale/ purchase
entry of goods- octroi duty
weakness-- agri and nonagri income, sales tax
Financial imbalance: in favour of Centre
Trf of resources from Centre to State: tax proceeds, grants n loans, plan assistance
It is concerned with the division of economic responsibilities between the Central and State and local govt.
Meaning of Fiscal Federalism
The govt can classified as :
a) Unitary system - All the governing power resides in a centralized govt. eg: UK
b) Federal system - The power to govern is shared between central, state and local govt.( Fiscal decentralization) eg: India
Key Issues in Fiscal Federalism
1 Division of responsibilities and resources-
Who makes the decisions about the programmes? Who pays for the programme?
involves financing, regulation and administration
Central govt. provide public goods like defence
2 Regulation-
Constitution restricts state and local govt
state and local govt subject to pollution and env regulations which apply to private firms
3 Incentives for resource transfer-
Central govt. grants and loans to state- leads to disparity in allocation
Types of transfer- Conditional & unconditional
4 Tax expenditure-
Sharing of central tax revenues with the states
5 Tax competition-
Local govt. use tax incentives to attract business- gains in one locality at the expense of losses in other
6 National and local Public goods-
eg: national defence benefits to all
eg: traffic lights benefits to particular locality
Not pure public goods.
7 Tax subsidies-
leads to increased expdt on publicly provided goods and increased capital invst
inefficient due to: wealthy investors, business, discriminate strong preference
8 Fiscal imbalance-
lack of harmony between functions and financial resources
mechanism to even out shortages and surpluses
FISCAL FEDERALISM IN INDIA
A] Division of functions
countrywide tasks to centre and state whereas local imp. to municipalities and panchayats
CG:development functions and non development
SG:development functions and non development
Jurisdiction:
defence uniformly
benefits economies of scale
foreign trade require national agenda
agriculture region to region
Problems:
overlapping -education and health
centrally sponsored schemes dont benefit targeted groups
B] Division of resource raising powers
Receipts of CG: Revenue receipts( taxes on income, property, commodities) non tax and capital receipts( IMF)
Receipts of SG: Revenue receipts ( tax on agri, profession, capital) non tax and capital receipts ( loans)
Criterion for division of tax powers: depends on
tax base- personal income
production- union excise duty, sale/ purchase
entry of goods- octroi duty
weakness-- agri and nonagri income, sales tax
Financial imbalance: in favour of Centre
Trf of resources from Centre to State: tax proceeds, grants n loans, plan assistance
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