Fiscal Relations

The document explores how financial power is shared between the Centre and the States in India, highlighting key challenges such as uneven tax distribution, increasing central control over resources, and the shrinking financial autonomy of states. The Finance Commission plays a crucial role in deciding how taxes and grants are shared, but it often struggles to address the financial imbalances between different states. The shift from the Planning Commission to NITI Aayog has changed how funds are allocated, and the introduction of the Goods and Services Tax (GST) has further reshaped state revenues, limiting their ability to raise their own funds.

India’s Constitution lays out the framework for tax distribution and financial transfers, primarily through the Finance Commission (Article 280) and Grants-in-Aid (Articles 275, 282). In the past, the Planning Commission played a significant role in allocating funds through Centrally Sponsored Schemes (CSS) and State Plan Assistance. However, since its dissolution in 2014, NITI Aayog now serves as an advisory body, while CSS continues to be a major tool for central influence over state finances.

The introduction of GST in 2017 was meant to simplify taxation, but it has made states more dependent on central compensation, reducing their financial independence. Although Finance Commissions have gradually increased the share of taxes going to states, disparities still exist, often benefiting wealthier states over poorer ones.

The document emphasizes the need to rethink India’s fiscal federalism, advocating for greater financial autonomy for states, a fairer tax-sharing system, and stronger Centre-State cooperation to ensure balanced and inclusive development across the country.

Keywords: Fiscal Federalism, Finance Commission, Planning Commission, Goods and Services Tax (GST), Tax Devolution, Centrally Sponsored Schemes (CSS), Revenue Deficit Grants, Article 280, Intergovernmental Transfers, Grants-in-Aid, NITI Aayog