federal finance system

FEDERAL FINANCEFEDERAL FINANCE

ALLOCATION OF RESOURCES ALLOCATION OF RESOURCES BETWEEN CENTRAL & STATE BETWEEN CENTRAL & STATE

GOVERNMENTSGOVERNMENTS

Federal FinanceFederal Finance

Sir Robert GarmSir Robert Garm::

“ “ Federation is a form of govt in which sovereignty of Federation is a form of govt in which sovereignty of political powers is divided between the central & political powers is divided between the central & local govts, so that each of them within its own local govts, so that each of them within its own sphere is independent of the other.”sphere is independent of the other.”

Hence, in a federation there is constitutional division of Hence, in a federation there is constitutional division of powers, functions & resources between the central powers, functions & resources between the central (federal) & the state (unit) govts.(federal) & the state (unit) govts.


In Unitary govt there is centralised public In Unitary govt there is centralised public finance, but in a federation two finance, but in a federation two constitutionally independent fiscal systems constitutionally independent fiscal systems operate upon the fiscal resources of the operate upon the fiscal resources of the individual citizens.individual citizens.

Thus in a federation fiscal structure is Thus in a federation fiscal structure is decentralised, & wheels within the wheels decentralised, & wheels within the wheels operate in the financial machinery.operate in the financial machinery.


Morton Gordzins - “ As colours are mixed in Morton Gordzins - “ As colours are mixed in marble cake, so functions are in the federal system.”marble cake, so functions are in the federal system.”

Few problems in allocation of revenue between the Few problems in allocation of revenue between the centre & the state-centre & the state-

overlapping of functionsoverlapping of functions overlapping of revenue resourcesoverlapping of revenue resources responsibilities dynamic in natureresponsibilities dynamic in nature Efficient solution & adjusting mechanism required Efficient solution & adjusting mechanism required

for the success of federal system.for the success of federal system.

Principles of Federal FinancePrinciples of Federal Finance Prof. B.P. Adarkar - Prof. B.P. Adarkar - “Principles & Problems of Federal “Principles & Problems of Federal

Finance”Finance” lays down 3 principles: lays down 3 principles:1.1. Independence & ResponsibilityIndependence & Responsibility2.2. Adequacy & ElasticityAdequacy & Elasticity3.3. Administrative Economy & EfficiencyAdministrative Economy & Efficiency Some other principles:Some other principles:1.1. Principle of EquityPrinciple of Equity2.2. Principle of Integration & Co-operationPrinciple of Integration & Co-operation3.3. Principle of AccountabilityPrinciple of Accountability4.4. Principle of Fiscal AccessPrinciple of Fiscal Access

FORMS OF FORMS OF INTERGOVERNMENTAL INTERGOVERNMENTAL FINANCIAL TRANSFERSFINANCIAL TRANSFERS

1.1. Distributive Pool Method, or distribution of tax Distributive Pool Method, or distribution of tax proceeds ( according to the Constitution of proceeds ( according to the Constitution of Federation)Federation)

2.2. Supplementary Levies (supplementary taxes over & Supplementary Levies (supplementary taxes over & above the principal tax)above the principal tax)

3.3. GrantsGrants4.4. Inter-Government Financial Institution (e.g. Inter-Government Financial Institution (e.g.

Australia has-Commonwealth Grants Commission; Australia has-Commonwealth Grants Commission; India constitutional provision for appointment of India constitutional provision for appointment of Quinquenial Financial Commission)Quinquenial Financial Commission)

Principles of Federal Finance Principles of Federal Finance observed in Indiaobserved in India

Clear-cut division of Taxing powers Clear-cut division of Taxing powers -The Union List ( List I)-The Union List ( List I) -The State List (List II )-The State List (List II ) -The Concurrent List (List III)-The Concurrent List (List III) Setting of Finance Commission -Article 280(a) every Setting of Finance Commission -Article 280(a) every

five years.five years. Division of Income tax (Article 270)Division of Income tax (Article 270) Division of Union Excises (Section 140(1)Division of Union Excises (Section 140(1) Grants-in-aids to the state (Article 275)Grants-in-aids to the state (Article 275) Protection of interest of the states (Article 274)Protection of interest of the states (Article 274)

Principles of Federal Finance Principles of Federal Finance observed in Indiaobserved in India

Therefore a good effort to incorporate the Therefore a good effort to incorporate the various important principles has been done, various important principles has been done, e.g.- principle of adequacy & elasticity, e.g.- principle of adequacy & elasticity, economy & efficiency, etc.economy & efficiency, etc.

Mr. M.V. Pylee – “the framework of entire Mr. M.V. Pylee – “the framework of entire financial fabric is based upon the assumption financial fabric is based upon the assumption of union-state- co-ordination.”of union-state- co-ordination.”

CONSTITUTION CONSTITUTION

Constitution of India adopted the salient features of Constitution of India adopted the salient features of the 1935 Actthe 1935 Act

Dr. B.R. Ambedkar – Chairman of the Drafting Dr. B.R. Ambedkar – Chairman of the Drafting committee of the constitutioncommittee of the constitution

Mr. B. N. Rau – Constitutional Advisor to the Govt.Mr. B. N. Rau – Constitutional Advisor to the Govt. Other leaders – Mr. K.M. Munshi, Mr. N.G. Other leaders – Mr. K.M. Munshi, Mr. N.G.

Ayyanger, etcAyyanger, etc Thus the Centre State Financial Relations under the Thus the Centre State Financial Relations under the

Constitution are based on the Act 1935.Constitution are based on the Act 1935.

PROVISIONS UNDER THE PROVISIONS UNDER THE CONSTITUTIONCONSTITUTION Three fold distribution of Legislative powers between Three fold distribution of Legislative powers between

Union & States (Article 246)Union & States (Article 246) I- Matters Parliament has exclusive power to make I- Matters Parliament has exclusive power to make

laws enumerated in List I, in the VII Schedule of the laws enumerated in List I, in the VII Schedule of the Constitution – Constitution – UNION LISTUNION LIST

II- The Legislature of any State has exclusive power to make laws for any of the matters LIST II – STATE LIST

The Parliament & the Legislature of any State have power to make laws with respect to matters in LIST III – CONCURRENT LIST

PROVISIONS UNDER THE PROVISIONS UNDER THE CONSTITUTION CONSTITUTION

Residuary powers of legislation vest in the Parliament. Thus Parliament has exclusive powers to make any law with respect to any matter not enumerated in the Concurrent List or State List. Such powers include the power of making laws for imposing a tax not stated in either of the lists. This provision has made the Union financial resources more elastic.

DISTRIBUTION OF FUNCTIONSDISTRIBUTION OF FUNCTIONS

UNION GOVERNMENT: 97 items 1.1. DefenceDefence2.2. Atomic energyAtomic energy3.3. Defence industriesDefence industries4.4. Foreign affairsForeign affairs5.5. CitizenshipCitizenship6.6. RailwaysRailways7.7. National highwaysNational highways8.8. Marine , Shipping & NavigationMarine , Shipping & Navigation9.9. AirwaysAirways10.10. Post & TelegraphPost & Telegraph11.11. Currency & Foreign exchangeCurrency & Foreign exchange12.12. Foreign loansForeign loans13.13. Foreign & Inter-state tradeForeign & Inter-state trade14.14. Important industries & Institutions of national importanceImportant industries & Institutions of national importance


STATE GOVERNMENTS – 66 itemsSTATE GOVERNMENTS – 66 items1. Public order2. Police 3. Administration of Justice4. Public Health5. Education6. Agriculture7. Forests8. Fisheries & other industries


UNION & STATE both – Concurrent 57 items

1. Commercial & industrial monopolies 2. Labour disputes3. Social security4. Charities5. Social legislation like- marriage & divorce6. Economic & social planning

THE TAX STRUCTURE UNDER THE TAX STRUCTURE UNDER THE CONSTITUTIONTHE CONSTITUTION

The Tax System in India;The Tax System in India;1.1. CENTRAL SOURCES OF REVENUE(LIST I )CENTRAL SOURCES OF REVENUE(LIST I )2.2. STATE SOURCES OF REVENUE (LIST II )STATE SOURCES OF REVENUE (LIST II )3.3. TAX LEVIED & COLLECTED BY THE UNION, BUT TAX LEVIED & COLLECTED BY THE UNION, BUT

ASSIGNED TO THE STATE (ARTICLE 269)ASSIGNED TO THE STATE (ARTICLE 269)4.4. DUTIES LEVIED BY THE UNION BUT COLLECTED & DUTIES LEVIED BY THE UNION BUT COLLECTED &

APPROPRIATED BY THE STATES( ARTICLE 268)APPROPRIATED BY THE STATES( ARTICLE 268)5.5. TAXES & DUTIES LEVIED & COLLECTED BY THE TAXES & DUTIES LEVIED & COLLECTED BY THE

UNION, PROCEEDS DISTRIBUTED BY THE UNION UNION, PROCEEDS DISTRIBUTED BY THE UNION TO THE STATES IN A PRESCRIBED MANNER TO THE STATES IN A PRESCRIBED MANNER (ARTICLE 270)(ARTICLE 270)

GERMAN PARLIAMENT - GERMAN PARLIAMENT - BUNDESTAGBUNDESTAG

In 1879, the Imperial In 1879, the Imperial Treasury (Treasury (Reichsschatzamt Reichsschatzamt ) ) was founded. It was initially was founded. It was initially headed by an Under-headed by an Under-Secretary of State, and Secretary of State, and eventually by a Secretary of eventually by a Secretary of State. It became a federal State. It became a federal ministry, the ministry, the Reichsenministerium Reichsenministerium derFinanzderFinanz, headed by a , headed by a federal minister, in 1919, federal minister, in 1919, and was renamed the and was renamed the Bundesministerium der Bundesministerium der FinanzenFinanzen in 1949 in 1949

TAXES IN GERMANYTAXES IN GERMANY

Taxes in GermanyTaxes in Germany—being a Federal —being a Federal Republic—are levied by the Federation Republic—are levied by the Federation ((BundBund), the States ( ), the States ( LänderLänder) as well as the ) as well as the Municipalities (Municipalities (GemeindenGemeinden). Many direct and ). Many direct and indirect taxes exist, whereof income tax and indirect taxes exist, whereof income tax and VAT are the most relevant. The German word VAT are the most relevant. The German word for tax is for tax is die Steuerdie Steuer which originates from the which originates from the Old High German word Old High German word stiurastiura meaning meaning helphelp. .

OTHER NATIONS HAVING OTHER NATIONS HAVING FEDERAL FINANCE SYSTEMFEDERAL FINANCE SYSTEM

Which other nations have federal finance Which other nations have federal finance system?system?

What are the other forms of finance system?What are the other forms of finance system?

federal finance system

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