Grand bargain 2.0: Protests by Karnataka and Kerala

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:

  1. 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.
  1. 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

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