Fiscal federalism in India has to satisfy the competing demands to deliver a number of essential and basic socio-economic services. As a paramount objective, fiscal federalism is expected to enable the national and sub-national governments to operate in such a way that leads to efficiency in the use of resources – not only in terms of the quality of services provided by the various levels of government but also in terms of creating the environment in which all economic agents use resources efficiently.

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Existing mechanism of devolution of finances between the Centre and the States.

Articles 268 to 293 in Part XII of the Constitution deal with Centre–state financial relations. Besides these, there are other provisions dealing with the same subject.

• Allocation of Taxing Powers: The Parliament has exclusive power to levy taxes on subjects enumerated in the Union List .The state legislature has exclusive power to levy taxes on subjects enumerated in the State List. Both the Parliament and the state legislature can levy taxes on subjects enumerated in the Concurrent List. The residuary power of taxation (that is, the power to impose taxes not enumerated in any of the three lists is vested in the Parliament. Under this provision, the Parliament has imposed gift tax, wealth tax and expenditure tax.
• Distribution of Tax Revenues: 42% of the total share of tax of Union will go to states. This is as per the recommendations of the 14th Finance Commission. The Finance Commission is required to recommend the distribution of the net proceeds of taxes of the Union between the Union and the States (commonly referred to as vertical devolution); and the allocation between the States of the respective shares of such proceeds (commonly known as horizontal devolution). GST Proceedings are distributed according to CGST, Act and SGST, Act. The Constitution also draws a distinction between the power to levy and collect a tax and the power to appropriate the proceeds of the tax so levied and collected. For example, the income-tax is levied and collected by the Centre but its proceeds are distributed between the Centre and the states.
• Distribution of Non-tax Revenues: The Centre The receipts from the following form the major sources of non-tax revenues of the Centre: (i) posts and telegraphs; (ii) railways; (iii) banking; (iv) broadcasting (v) coinage and currency; (vi) central public sector enterprises; and (vii) escheat and lapse. The States The receipts from the following form the major sources of non-tax revenues of the states: (i) irrigation; (ii) forests; (iii) fisheries; (iv) state public sector enterprise; and (v) escheat and lapse.
• Grants-in-Aid to the States: Besides sharing of taxes between the Centre and the states, the Constitution provides for grants-in-aid to the states from the Central resources. There are two types of grants-in-aid, viz, statutory grants and discretionary grants:

• • • Statutory Grants: Article 275 empowers the Parliament to make grants to the states which are in need of financial assistance and not to every state. Also, different sums may be fixed for different states. These sums are charged on the Consolidated Fund of India every year. Apart from this general provision, the Constitution also provides for specific grants for promoting the welfare of the scheduled tribes in a state or for raising the level of administration of the scheduled areas in a state including the State of Assam. The statutory grants under Article 275 (both general and specific) are given to the states on the recommendation of the Finance Commission.
    • Discretionary Grants: Article 282 empowers both the Centre and the states to make any grants for any public purpose, even if it is not within their respective legislative competence. Under this provision, the Centre makes grants to the states.
• Other Grants: The Constitution also provided for a third type of grants-in aid, but for a temporary period.  These sums were charged on the Consolidated Fund of India and were made to the states on the recommendation of the Finance Commission.

Do States autonomy to mobilize finances of their own?

Constitution of India empowered States to mobilize their own finance.

• The States has exclusive power to levy taxes on subjects enumerated in the State List
• Both the Center and the States can levy taxes on subjects enumerated in the Concurrent List

• States have autonomy in Collection of Non Tax Revenues.

However, there are instances shows States autonomy is curtailed to mobilize their own finances.

• States will get their Share in net proceeds of taxes according to Finance Commission’s recommendations.
• Constitution empowers the Parliament to make statutory grants to the states which are in need of financial assistance.
• The States have, to look to the Centre for funds in case of unforeseen calamities or to carry out various schemes.
• While the proclamation of national emergency (under Article 352) is in operation, the president can modify the constitutional distribution of revenues between the Centre and the states. This means that the president can either reduce or cancel the transfer of finances (both tax sharing and grants-in-aid) from the Centre to the states.
• While the proclamation of financial emergency (under Article 360) is in operation, the Centre can give directions to the states in financial matters.

Conclusion

The Constitution envisages the Finance Commission as the balancing wheel of fiscal federalism in India. The new framework of grants should ensure stability in resource flows to the states to reduce state specific development deficits.