Introduction: Like any other resource, money is also available in a limited quantity to the government. So, it must be distributed and utilised by various government bodies judiciously and effectively. Thus, our constitution has clearly defined how the direct and indirect taxes or any other form of earning that the government makes should be divided between the state and the centre.

The sources of income as prescribed by the Constitution of India for the Central Government are:

1. Taxes levied on all forms of income other than agricultural. 
2. Property (land) succession duties except what is levied on agricultural land
3. Corporation tax
4. Customs duties (not from narcotic or alcoholic articles)
5. Taxes on asset capital (not from agricultural land)
6. Stamp duty from a particular set of financial documents
7. Taxes (excluding stamp duties) on transactions on financial markets
8. Taxes for advertising in newspapers and on their sales
9. Taxes on train tickets (passenger and cargo)
10. Taxes are levied when the transaction occurs between two parties in different states.

These specific factors in the constitution authorises the central government with residual power.

Earnings of state government:

1. Land revenue and stamp duty apart from those mentioned in the Union list
2. GST (except on newspapers)
3. Taxes on agricultural income
4. Excise duties on liquors, opium, and other narcotics, and drugs
5. Taxes on land and buildings
6. Irrigation duties
7. Succession duties and estate duty on agricultural land
8. Taxes on betting and gambling, entertainment and amusement
9. Taxes on animals, vehicles, boats, and advertisements
10. Taxes on professions and trades
11. Taxes on the consumption of electricity, amusements, and luxuries 
12. Taxes on the entry of goods into local areas

However, a few taxes are not entirely kept by any of the parties. In some cases, the taxes are levied by the Central Government but collected and used by the state government, with the Central Government having no say in how they use those funds. Examples of such duties include stamp duties. At the same time, some taxes are collected by the Central Government but are then allocated to the same states from where they were collected. An example includes duties levied on succession and estate duties on non-agricultural land. 

Still, there are taxes defined and collected by the Central Government, but the collected amount is shared with the State Government. Two major examples of such taxes are Income Tax and Union Excise duties. The ratio in which the collected amount is divided between the two bodies is calculated by the Finance Commission, considering both parties’ needs. The President of India appoints the finance commission for five years. 

These sources are inadequate for the weaker states to carry out their development programs. Thus, the constitution provides aid, i.e. grants-in-aid, which are to be made by the Union to states for their assistance in developing and promoting welfare in tribal areas. 

The Scheme of the Finance Commission: 

The constitution of India sets a finance committee for the suggestion of state shares. These schemes are released to model the financial relations between Union and the states to be more flexible and pliant towards requisites. 

Some suggestions delineated by the 13th finance commission for the year 2010-15 are outlined below:

• States’ shares should be increased by 1.5% to make it to 32% of the shareable Central taxes. 
• The net percentage of the fiscal deficit from GDP should be reduced to 3%. 
• 68% of GDP should be allotted towards the debt of centres and states. 
• New actions are required to reduce and restore the predominance of formula-based grants. 
• Suitable measures should be taken to address the issues in the power sector. 

Criteria for distribution of financial resources shares:

Each state’s share of financial resources is distributed according to four criteria established by the Finance Commission of India. These four criteria are:

1. Population – The population factor makes up 25% of population enumeration. 
2. Area – The area covers 10% of the weightage. 
3. Fiscal Capacity Distance – covers 47.5%.
4. Fiscal discipline – covers 17.5%. 

Based on the above criteria, Uttar Pradesh is provided with the highest financial resources, i.e. 19.677 percent. 

Conclusion:

Apart from the Finance Commission, commissions such as the Planning Commission also assign funds to state governments based on needs and levels of development. Regardless of the number of criteria for allocating funds to states, the financial motive is to make each state financially independent by granting capital for their disposal.