What are the different modes of transfer of funds from the centre to thestates?Discuss in 500 words please
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There are different layers of government with specific power and responsibilities defined by the Indian Constitution. Taking into account the amendments made so far the Constitution provides for three layers of the government: Central, State and Local. In.order to carry out its responsibilities the government at each level has been assigned powers to impose taxes on individuals and organizations based on criteria such as income, expenditure, production and certain economic transactions. The major source of revenue for the central government is income tax, central excise, and custom duties. On the other hand, there is a long list of taxes assigned to the states (including taxes on alcoholic beverages, agricultural income, and land) but the major source of tax revenue for the states is the sales tax. The tax base of the local governments is limited to local services and production.
While analyzing inter-governmental fiscal relations, one, there_should be no fiscal overlapping so that the same tax should not be imposed by more than one layer of government. The Seventh Schedule of the Indian Constitution specifies the manner in which taxes are to be imposed by the central and the state level governments. Two, taxation power is assigned to.a particular level of government keeping in view the geographical area on which the impact of the tax is felt. Thus the tax categories assigned to the Center are generally broad-based and their impact is felt beyond state boundaries. Three, the residual power with respect to taxation remains with the central government. While exercising such power the Center introduced ‘service tax’ during 1990s On the provision of specific services. The share of services sector in GDP is more than half and its share is increasing over time. Service tax is slated to be an important source-of revenue in time to come. Four, imposition of taxes and fixation of tax rates is a matter of political economy. In order to further political interests governments have many times in the past waived taxes or excluded certain categories from taxation. A widely debated issue in this context is imposition of taxes on agricultural income, which is a state subject and state governments have- invariably avoided taxation of rural rich. It has allowed to farmers and report non-agricultural income as agricultural income. Five, there is a mismatch between the tax base and the responsibilities assigned to different layers of governments. The states have always complained about inadequate revenue compared to their expenditure. Similarly, there is shortage of funds at local government level compared to the expenditure they Carly out. Six, tax base is unevenly distributed across states. For example rich states have a relatively higher share of people who pay taxes. Similarly, relatively higher amount of excises is collected from industrially better off areas.
In order to tackle the problems of inadequate tax revenue at the state level, the Center transfers fund to the states. Apart from meeting the gap between revenue and expenditure the devolution of funds to subordinate layers of government has the effect of bringing in regional balance in economic development over time.
There are three modes of transfer of funds from the Center to the states.
The center collects certain taxes (particularly, personal income tax and excise duties) and allocates a share of the tax, proceeds to the states. In order to streamline such allocation the constitution provides for setting up of a Finance Commission every five years, which suggests criteria of such sharing’ between the Center and the states on the one hand,. and among-st different states on the other. So far twelve Finance Commissions have been set up and each Finance Commission has suggested formally for devolution of funds. The factors taken into account while suggesting such formally have been poverty, backwardness, tax effort, fiscal discipline and population.Mode of transfer of funds from the Center to the states is the grants “and loans extended to states for implementing development plans. As you know, while preparing the Five Year Plans the Center sets targets and investments by different sectors of the economy. Against this backdrop’ the states prepare their annual plans which is approved by the Planning Commission. The states receive grants and loans form the Center which supplement the revenue generated at the state level. The Planning Commission allocates funds to states as per formally devised by the National Development Council. For major states the ratio of grants to loan is 30:70.The third mode of transfer of funds from the Center to the states is the grants given by central ministries to their counterparts in different states for specified projects. Such projects are wholly funded by the Center (under `central schemes’) or the states are asked to contribute a proportion of the Cost (in the case of ‘centrally sponsored schemes’).
While analyzing inter-governmental fiscal relations, one, there_should be no fiscal overlapping so that the same tax should not be imposed by more than one layer of government. The Seventh Schedule of the Indian Constitution specifies the manner in which taxes are to be imposed by the central and the state level governments. Two, taxation power is assigned to.a particular level of government keeping in view the geographical area on which the impact of the tax is felt. Thus the tax categories assigned to the Center are generally broad-based and their impact is felt beyond state boundaries. Three, the residual power with respect to taxation remains with the central government. While exercising such power the Center introduced ‘service tax’ during 1990s On the provision of specific services. The share of services sector in GDP is more than half and its share is increasing over time. Service tax is slated to be an important source-of revenue in time to come. Four, imposition of taxes and fixation of tax rates is a matter of political economy. In order to further political interests governments have many times in the past waived taxes or excluded certain categories from taxation. A widely debated issue in this context is imposition of taxes on agricultural income, which is a state subject and state governments have- invariably avoided taxation of rural rich. It has allowed to farmers and report non-agricultural income as agricultural income. Five, there is a mismatch between the tax base and the responsibilities assigned to different layers of governments. The states have always complained about inadequate revenue compared to their expenditure. Similarly, there is shortage of funds at local government level compared to the expenditure they Carly out. Six, tax base is unevenly distributed across states. For example rich states have a relatively higher share of people who pay taxes. Similarly, relatively higher amount of excises is collected from industrially better off areas.
In order to tackle the problems of inadequate tax revenue at the state level, the Center transfers fund to the states. Apart from meeting the gap between revenue and expenditure the devolution of funds to subordinate layers of government has the effect of bringing in regional balance in economic development over time.
There are three modes of transfer of funds from the Center to the states.
The center collects certain taxes (particularly, personal income tax and excise duties) and allocates a share of the tax, proceeds to the states. In order to streamline such allocation the constitution provides for setting up of a Finance Commission every five years, which suggests criteria of such sharing’ between the Center and the states on the one hand,. and among-st different states on the other. So far twelve Finance Commissions have been set up and each Finance Commission has suggested formally for devolution of funds. The factors taken into account while suggesting such formally have been poverty, backwardness, tax effort, fiscal discipline and population.Mode of transfer of funds from the Center to the states is the grants “and loans extended to states for implementing development plans. As you know, while preparing the Five Year Plans the Center sets targets and investments by different sectors of the economy. Against this backdrop’ the states prepare their annual plans which is approved by the Planning Commission. The states receive grants and loans form the Center which supplement the revenue generated at the state level. The Planning Commission allocates funds to states as per formally devised by the National Development Council. For major states the ratio of grants to loan is 30:70.The third mode of transfer of funds from the Center to the states is the grants given by central ministries to their counterparts in different states for specified projects. Such projects are wholly funded by the Center (under `central schemes’) or the states are asked to contribute a proportion of the Cost (in the case of ‘centrally sponsored schemes’).
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