How does federal finance work in India?

India Finance Concept

India is democratic as the people elect their government. In India’s federal system, India has a Central government and a state government (and of course so many local governments under the state government). The Central government and the state governments are independent of each other. The funds and resources they receive are shared and reallocated very efficiently. In India, some taxes are levied by the Central government whereas the state governments levy some taxes. Federal finance in India can be divided into three categories: Distribution of financial powers, mechanism of resource transfers and finance commission.

Distribution of financial powers.

The Centre levies tax and non-tax revenues. There are 12 items taxed under the tax revenue like income tax, corporation tax etc.  Out of all what the government receives, they have to share 29.5 % of their income with the state governments on the recommendations of the finance commissions. The non-tax tax by the Centre includes borrowings mostly. The central government can borrow both within the Country and from outside the Country. Income from government undertakings, income from government property, interest earnings on loans, gift and donations all come under non-tax revenue. The state levies both revenue as well as non-revenue tax. There are 19 items taxed under the tax revenue like income on agriculture, tax on land revenue, sales tax, etc. Non-revenue tax includes fees taken in all courts except the Supreme Court, aids, grants, royalty from the mines, forest, etc.

Mechanism of resource sharing.

The state cannot function on its own. They need financial assistance from the Centre. The receipts that reach the Centre are shared efficiently between the states based on the recommendations of the finance committee. The taxes, grant – in- aids, loans receives by the Centre is allocated to the states as well. The ratio in which the loans and grants are redistributed to the states come in the ratio 70:30.

Finance Commission.

The president of India used to appoint the president of financial commission once every five years. Now the financial commission is replaced by Niti Ayog since the Modi government came to power. The devolution of assistance by the Centre has been classified as follows. 60% is by population25% by per capita income with 20% depending on the deviation and the remaining 5% by distance. 7.5% is based on national priority and special performance.


What is a budget?

A budget provides financial guidelines to a Country. It contains records of the financial proceedings of the country. All the statements of the anticipated expenses and proposed spending are mentioned in the budget. A balanced budget is when the total Revenue received by the government equals the total expenditure of the government.