What are the different modes of transfer of funds from the centre to the
states?Discuss.
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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’).
The devolution of funds from the Center to the states has been a matter of political economy. The allocation of funds across states, particularly by the Planning Commission and Central Ministries, is riddle with bargaining power of the state government, presence of pressure groups, and political interests rather than balanced economic growth. The grants extended to local bodies by the states is mostly discretionary and no set rule is formulated so far. The adoption of value added tax (VAT) by states in lieu of sales tax has opened up fresh debates on tax base of the state governments.
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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’).
The devolution of funds from the Center to the states has been a matter of political economy. The allocation of funds across states, particularly by the Planning Commission and Central Ministries, is riddle with bargaining power of the state government, presence of pressure groups, and political interests rather than balanced economic growth. The grants extended to local bodies by the states is mostly discretionary and no set rule is formulated so far. The adoption of value added tax (VAT) by states in lieu of sales tax has opened up fresh debates on tax base of the state governments.
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