Discuss, the evolution of fiscal federalism in India, in the light of developments in recent years.

Fiscal federalism refers to distribution of fiscal powers between the various organs of governments, viz. Union, State, 3rd tier.

Recent changes such as 101st constitutional amendment act (GST) and debate around cesses have brought fiscal federalism into news.

Evolution of fiscal federalism over time:

  1. 1950-1990:
    • Establishment of finance commission to recommend devolution of finances to states.
    • Article 270-280 mentions distribution of taxation powers between centre and states.
  2. 1990’s -2000:
    • 10th Finance Commission recommended devolution to states as a share in next proceeds of taxes for 1st This led to huge jump in share of proceeds to states.
    • 73rd and 74th constitutional amendment acts recommended devolution of taxation powers to PRIs & Municipalities (11th & 12th schedules).
  3. Contemporary Phase:
    • 14th Finance commission – Huge jump in share of net proceeds of taxes to states. It gave greater fiscal autonomy to states.
  4. Recent centralizing tendencies:
    • Enactment of GST Act, subsuming certain taxation powers from centre & states to a common pool – Fiscal cooperation.
    • Increase in share of cesses & surcharge as a percentage of taxes.
    • Denial to compensation cess to states in wake of Covid pandemic.

Way forward:

  • As recommended by 15th FC, rationalization of cesses & surcharges.
  • Incentivize greater devolution of taxation powers by states to the 3rd tier (15 FC).
  • Use of GST council for consensus-building on decisions with states.

Fiscal federalism is crucial to the realization of the true federalism in India.


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