00e0000 Another look at fiscal transfers By- Yasmin Gill
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Another look at fiscal transfers (The Hindu) Federalism is an old concept. Its origin is mainly political It is well known that the efficiency of a government depends on, among other factors, its structure In large countries, it has been felt that only a federal structure can efficiently meet the requirements of Underlying is the premise that preferences vary across regions. During the independence struggle, provincial autonomy was regarded as an integral part of the freedom movement However, after Independence, several compulsions, which included defence and internal security, led to a scheme of federalism in which the Centre assumed greater importance. Later when the Centre and all States were ruled by the same party and when many of the powerful provincial leaders migrated to the Centre, the process of centralisation gathered further momentum Economic planning helped this centralising process.
New developments 14th FC major recommendations -increase the share of ta>x devolution to 42% of the divisible pool This is a substantial increase by almost 10 percentage points The commission has argued that this does not necessarily affect the overall transfers but only enhances the share of unconditional transfers Also Centrally sponsored schemes, which have ballooned in recent years, may have 'encroached on territory of States Performance of the Central government is judged not only on the basis of actions taken which fall strictly in its jurisdiction but also on initiatives undertaken in the areas which fall in the Concurrent and even State lists Centralized planning has something to do with it Today, the Central government is held responsible for everything that happens, including, for example, agrariarn distress n viewing the responsibilities of the Centre and States we must a broader view than what is stipulated in the Constitution
On the allocation of unconditional transfers, two questions arise The first is to determine total transfers that need to be made, while the second is whether all transfers must be done by FC alone FCs prior to 14th recognised that some transfers were being made by PC; this was kept in mind while deciding on tax devolution NITI Aayog-simply a think-tank with no powers of resource allocatiorn .In this context perhaps what 14th FC did was justifiable Of course, 14th FC did what it did because terms of reference had not made any distinction between Plan and non-Plan revenue expenditures The moot question is about what happens if any future govern ment revives the Planning Commission with financial powers This will put the Central government in a fix.
Some suggestions Perhaps the time has come for the Constitution to be amended and the proportion of shareable taxes that should go to States fixed at the desired level The shareable tax pool must also include cesses and surcharges as these have sharply increased in recent years fixing the ratio at 42% of shareable taxes, including cesses and surcharges, seems appropriate Another possible route is to follow the practice in the U.S. and Canada: of allowing the States to levy tax on personal income, with some limitations Since one of the concerns is that resources do not match functions, this may be a way out .But, as in the U.S., the scheme should be simple and ride on federal income tax, that is, just a levy on the income assessed by federal authorities The freedom given to States must be limited. It is important to note that the levy by the Centre and States together should be reasonable.
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So Central government should have the responsibility to levy non-benefit taxes and taxes on mobile units or resources Building principles into an actual scheme in a Constitution is indeed very difficult Different Constitutions interpret differently what is mobile and what is purely a benefit tax For example, in US and Canada, both Federal and State governments have concurrent powers to levy income tax On the contrary, in India, income tax is levied only by Central government though shared with the States Recognising the possibility of imbalance between resources and responsibilities, many countries have a system of inter-governmental transfers