Fiscal Federalism: During Devolution of Union Revenue and Grants-in-Aid

Abstract

The complete separation of Union State taxing powers is one of the two chief characteristics of the financial provisions of the Indian federal system. The entire taxing area has been divided between the Union and the States and in that way, the possibility of double taxation has been totally precluded. It is so to avoid problems of overlapping and multiple - taxation between the Centre and the States which have arisen in other federation. During the tax devolution and grants given to the States based on the recommendations of the Finance Commissions, the Central Government gives specific purpose grants, also known as Discretionary Grants, for various purposes through the respective ministries. The objective of specific purpose transfers, as mentioned earlier, is to ensure minimum standards of services in respect of those services that are considered meritorious or those services with significant inter-state spillovers. However, in Indian context, this has been used as a patronizing instrument to serve political objectives of the ruling parties at the Centre to woo the States and the electorate by expanding its reach to spend on the State subjects.