General Awareness

April 04, 2017 @ 01:15 PM

April 04, 2017 @ 01:15 PM

K. J. Somaiya Institute of Management Studies and Research, Mumbai

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Allocation of resources between centre and states

General awareness on current topics is essential as not only you will be getting questions on   GK in various MBA entrance exams but it will be useful for Essay writing test and WAT also.

Today, you will read General Awareness Topic:  Allocation of resources between centre and states

Indian constitution provides for the strong centre and weak states and it stands politically as well as economically. Most of the important revenue generating taxes like income tax, customs duty, excise duty etc are under the Union list of Schedule 7 of the constitution of India. Because of this fact, states had to depend on the centre for financial resources and are often sarcastically called as ‘glorified municipalities’. 
The constitution of India defines the distribution of the tax-revenue between the Union and the States in following manner 
Taxes belonging to the Union exclusively:
Customs, Corporation Tax, Taxes on capital value of assets of individuals and companies, Surcharge on Income Tax, Fees in respects of matters in the Union List.
Taxes belonging to the States Exclusively:
Land Revenue, Stamp duty except in documents included in the Union List, Succession duty, Estate duty, and Income tax on agricultural land, taxes on passengers and goods carried on inland waterways taxes on lands and buildings, mineral rights. Taxes on animals and boats, on road vehicles, on advertisements, on consumption of electricity, on luxuries and amusements, etc. (This is being supplemented by a new system of Value Added Tax i.e. VAT). 
Duties Levied by the Union but Collected and Appropriated by the States
Stamp duties on bills of Exchange, etc., and Excise duties on medical and toilet preparations containing alcohol. (Article 268)
Taxes Levied as Well as Collected by the Union, but Assigned to the States within which they are leviable
Duties on succession to property other than agricultural land, Estate duty in respect of property other than agricultural land terminal taxes on goods or passengers carried by railway, air or sea taxes on railway fares and freights and so on.
Taxes Levied and Collected by the Union and Distributed between Union and the States: 
Certain taxes shall be levied as well as collected by the Union, but their proceeds shall be divided between the Union and the States in a certain proportion, in order to effect on equitable division of the financial resources which includes taxes on income other than on agricultural income, duties of excise as are included in the Union List, excepting medicinal and toilet preparations may also be distributed, if Parliament by law so provides.
However, the above mentioned sources are not adequate for the States to carry out the development programmes and the Constitution provides that grants-in-aid shall be made in each year by the Union to such States as Parliament may determine to be in need of assistance; particularly for the promotion of welfare of tribal areas etc.
The scheme of financial relations between the Union and the States is flexible and adaptable to varying needs according to different situations. The constitution of India establishes Finance Commission of India to suggest the state’s share in central pool of taxes. The major recommendations of 13th Finance Commission whose recommendations are applicable for 2010-15 are –
•The share of states in the net proceeds of the shareable Central taxes should be 32%. This is 1.5% higher than the recommendation of 12th Finance Commission.
•Revenue deficit to be progressively reduced and eliminated, followed by revenue surplus by 2013-14.
•Fiscal deficit to be reduced to 3% of the GDP by 2014-15.
•A target of 68% of GDP for the combined debt of centre and states.
•The Medium Term Fiscal Plan (MTFP) should be reformed and made the statement of commitment rather than a statement of intent.
•FRBM Act need to be amended to mention the nature of shocks which shall require targets relaxation.
•Both centre and states should conclude 'Grand Bargain' to implement the model Goods and Services Act(GST).To incentivize the states, the commission recommended a sanction of the grant of Rs 50000 crore.
•Initiatives to reduce the number of Central Sponsored Schemes (CSS) and to restore the predominance of formula based plan grants.
•States need to address the problem of losses in the power sector in time bound manner.
There is a formula based on four criteria set up by the Finance Commission of India to define each state share in the state’s share of financial resources. These four criteria are assigned different weight according to their importance –
1.Population – The population of a state is given a weightage of 25 percent, however, for population enumeration; data of 1971 census is used.
2.Area - 10 percent weight
3.Fiscal Capacity Distance – 47.5 percent
4.Fiscal discipline -  17.5 percent
Based on above formula, share of Uttar Pradesh with 19.677 percent is highest. In this manner, states are entitled for the resources from centre over and above their own resources. Apart from the funds allocated by the Finance Commission, planning commission also recommends the funds to the state governments which are based on the level and need of development and there is no set formula for it.
Though there exists a set pattern for the distribution of resources between centre and states, still it is accepted that states should be made financially independent by giving them more financial autonomy and providing them more financial resources for their disposal.
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