Syllabus: GS-III
Subject: Economy
Topic: Fiscal policy and Budgeting
Issue: Fiscal Federalism
Context: The protest of Karnataka and Kerala against the union govt.’s fiscal policies towards them.
Concerns – letter and spirit of fiscal federalism:
- The disparity between revenue generation capacities and expenditure responsibilities:
- Centre accounts for more than 60 per cent of the gross tax revenues collected together with the states.
- The states have over a 60 per cent share in total government spending.
- Goods and Services Tax (GST) regime widened the imbalances:
- It replaced the value added tax (VAT) and a number of other levies that were major sources of revenue for the states earlier.
Way forward:
- A consensus based, transparent mechanism is required in matters of tax devolution and other resource transfers, both vertical (Centre to states) and horizontal (among states).
- The next finance commission should frame clear and transparent rules for distribution of the Centre’s tax proceeds and grants-in aid.
- Centre should not levy non-sharable cesses and surcharges on taxes.
- States should strictly adhere to deficit targets and borrowing limits.
| Prelims Connect:
VAT: Value Added Tax is the tax that is charged on goods and services, levied at each stage of a supply chain. GST: GST, or Goods and Services Tax, is an indirect tax imposed on the supply of goods and services. It is a multi-stage, destination-oriented tax imposed on every value addition, replacing multiple indirect taxes, including VAT, excise duty, service taxes, etc. Finance Commission |
