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UNIT 5

Indian public finance

Q1) Explain Financial Federalism under constitution.

A1)

Federalism is best understood as a method of promoting self rule and of balancing the interests of a nation with that of its regions. A federal system is the constitutional form. It is typically identified with the existence of four institutional characteristics

a) There should be two sets of governments, each with its independent spheres of administrative and legislative competencies.

b) Each set of government should have independent tax base.

c) There should be written constitution from which each side derives its legislative power.

d) In case of conflict, there should be a system of independent judicial courts to arbitrate between the center and the constituent units.

The term was introduced by the German-born American economist Richard Musgrave in 1959. Fiscal federalism deals with the division of governmental functions and financial relations among levels of government.

Features of federalism

a) Two or more levels.

b) Each levels has its own jurisdiction.

c) Each level jurisdiction is specified.

d) Fundamentals of constitution can’t be changed central level itself.

e) In the disputes of different level court work as an umpire.

f) Revenue sources of each level are specified.

g) Federalism has two objectives – safeguard and promote national unity, accommodation of regional diversity.

Under Article 246 of the Constitution lays down the three list of subjects on which different levels of government can make laws. Under list I the Union can make laws relating to the subject matter given. Under list II the Sates has the authority to make laws relating to subjects given, and list III, also called as the Concurrent List, which allows both the Union and the States to make laws, relating to subjects provided by the list.

As a subject matter the three list includes taxation. The Union List (I) includes taxes like Customs and Excise duties, Corporation Tax, taxes on income other that agricultural income, etc. List II includes taxes like taxes on vehicles, taxes on liquors, land revenue, taxes on stamp duties, taxes on entertainment and luxuries, taxes on sale or purchase of goods, etc. As such List III, or the Concurrent List does not contain any major tax.

The systematic arrangement of dividing the powers of levying and collecting tax between the Centre and the state will enable coordination between union and the states.

Q2) Explain Financial Adjustment in India.

A2)

Financial adjustment is used to reduce the fiscal imbalance of both vertical and horizontal types through fiscal transfer from central government to state and local governments. In order to reduce regional inequalities of income and wealth in the federation fiscal transfer are used.

Methods of fiscal adjustments

a) Divisible pool method – Under this method for the purpose of distribution across the federating states either a fixed percentage of net revenue from all the taxes or identified select taxes are pooled on the basis of a criterion. This method of fiscal transfer is also known as distributive pool or shared tax revenue method. The advantages of this method are it is simple to administer, efficient and equitable distribution of financial resources among the states.

b) Supplementary levies – Under this method, tax imposed by a tier of government over and above the basic tier of the same tier or that of the other tier. Thus the financial resources are used for a specific or general purpose of the state. The advantages of this method are it is simple to administer, efficient and equitable distribution of financial resources among the states.

c) Federal grants – Fiscal adjustment important method is the grant in aid. These are used to reduce both vertical and horizontal fiscal imbalances provided by the federal government to the states. Federal grants are categorized into conditional grants and unconditional grants.

Conditional grants - If the ‘grantor’ insists on any conditions while providing the grant to the ‘grantee’, either with reference to its eligibility or in it use, the grant is known as a-‘conditional grant’

Unconditional grants - If the grantor provides grants to the grantee without stipulating any conditions, either with reference to its eligibility or its use, the grant is known as unconditional grant. It is also known as general purpose grants.

Q3) Explain finance commission.

A3)

Finance Commission is a constitutional body its purpose is to allocate certain revenue resources between the Union and the State Governments. Under Article 280 of the Indian Constitution finance commission was established by the Indian President. To define the financial relations between the Centre and the states finance commission was created. It was formed in 1951.

Articles 280 and 281 deals with finance commission of India the composition of finance commission of India includes chairman who heads the commission and should have public affairs experience, four members. The parliament determines the selection method and qualification of the members of the commission.

Qualifications of Finance Commission Chairman and Members

a) The four members should be qualified as high court judges.

b) President makes all appointment of the country.

c) As schedule by the parliament the members shall give part time or service to the commission.

d) The salary of the members is as per the provisions laid down by the Constitution.

e) The president of India specifies the tenure of the member of the finance commission. In some cases the members are also re appointed.

Function of finance commission

a) The distribution between the union and the states of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the states of the respective shares of such proceeds.

b) The principles governing the federal grants to the states by the center out of the consolidated fund of India

c) The Commission decides the basis for sharing the divisible taxes by the centre and the states

d) in order to affix the resources of the state Panchayats and Municipalities, the finance commission evaluates the rise in the Consolidated Fund of a state

e) The finance commission has sufficient powers to exercise its functions within its activity domain.

Key roles

a) The main role of finance commission is to act as an instrument to divide the divisible taxes between the states and the Union government. It determines the allocation of taxes collected by the center.

b) It determines the principle of governing the federal grants of the revenues of states out of the consolidated fund of India.

c) Finance commission lays down the distribution of income tax between the union and the states.

d) Another important role is to focus on the financial relations between the state government and the central government.

e) Finance commission is an autonomous body to bring coordination and cooperation for smooth working of the federal system.

Q4) Explain Review of Indian Tax System Budgetary Procedure and Financial Control in India.

A4)

Indian budget process:

The finance minister prepares the budget with the assistance of number of advisors and bureaucrats. Prior to preparation, the finance minster seeks the view of the industry captains and economists. Normally in the third quarter of the financial year, the budget making process starts.

The budget has four stages as follows

Stage 1 – Estimates of expenditure and revenues

Estimates of expenditure – the various ministers begin the process by providing initial estimates of plan and non-plan expenditures. The expenditure plan is discussing with the planning commission. On the basis of resources available the planning commission allocates resources for continuing plan programmes and decides on the new programmes that can be undertaken. The non plan expenditure is accounted for by interest payments, subsidies (mainly on food and fertilizers) and wage payments to employees and is prepared by the financial advisor.

Estimates of revenue – revenue are capital and current receipts. Capital receipts includes repayment of loans given by the government, receipts from divestment of public-sector equity and borrowings—both domestic and external. Current receipts include mainly, tax revenues, receipts by way of dividends from public-sector units and interest payments on loans given out by the central government. Revenue is calculated on the basis of existing rates of taxation and taking into consideration the likely growth and inflation rate over the ensuing fiscal year.

Stage 2 – First estimates of deficit

After estimating the revenue and expenditure this result in providing the first estimates of shortfall in expected revenue to meet projected expenditures. Then the government consult the chief economic advisor to decide the optimum level of borrowings to meet the deficit. The borrowings can be through internal or external on the basis of level of fiscal deficit that the government targets for itself.

Stage 3 - Narrowing the deficit

The overall budget deficit is decided after the targets of fiscal deficit. The remaining shortfall is filled by the revision in the tax rate. The deficit can be reduced by modifying the plan expenditure. Non plan expenditure includes interest payments, subsidies and administrative expenditure which the government is inflexible about changing it.

Stage 4 – The budget

The presentation of budget is usually done on the last working day of February. Under Article 112 of the constitution, the union government is required to lay an annual financial statement of estimated receipts and expenditure before both Houses of Parliament.

Financial control in India-

Parliament controls public finance which includes granting of money to the administration for expenses on public services, imposition of taxes and authorization of loans. Based on four principles the Indian Constitution devises elaborate machinery for securing parliamentary control over finances.

The first principles in the matters of finance regulate the constitutional relation between the Government and Parliament. The executive without the authority of parliament cannot raise money through borrowings or taxation.

The second principles in the financial matters regulate the relation between the two Houses of Parliament. The lokshabha has the power of raising money by tax or loan. The Rajya Sabha merely agrees to it and cannot revise or alter. Thus, financial powers have been concentrated in the Lok Sabha and the Rajya Sabha plays only a subsidiary role in this respect.

The third principle levied restriction on the power of Parliament to authorize expenditure. Except on demand by Ministers, Parliament cannot vote money for any purpose.

The fourth principle levied a similar restriction on the power of Parliament to impose taxation except upon the recommendation of the Executive, Parliament cannot impose any tax

Q5) Explain methods of financial adjustments.

A5)

Methods of fiscal adjustments-

Divisible pool method – Under this method for the purpose of distribution across the federating states either a fixed percentage of net revenue from all the taxes or identified select taxes are pooled on the basis of a criterion. This method of fiscal transfer is also known as distributive pool or shared tax revenue method. The advantages of this method are it is simple to administer, efficient and equitable distribution of financial resources among the states.

2. Supplementary levies – Under this method, tax imposed by a tier of government over and above the basic tier of the same tier or that of the other tier. Thus the financial resources are used for a specific or general purpose of the state. The advantages of this method are it is simple to administer, efficient and equitable distribution of financial resources among the states.

3. Federal grants – Fiscal adjustment important method is the grant in aid. These are used to reduce both vertical and horizontal fiscal imbalances provided by the federal government to the states. Federal grants are categorized into conditional grants and unconditional grants.

Q6) Explain the function and role of finance commission.

A6)

Qualifications of Finance Commission Chairman and Members

a) The four members should be qualified as high court judges.

b) President makes all appointment of the country.

c) As schedule by the parliament the members shall give part time or service to the commission.

d) The salary of the members is as per the provisions laid down by the Constitution.

e) The president of India specifies the tenure of the member of the finance commission. In some cases the members are also re appointed.

Function of finance commission

b) The principles governing the federal grants to the states by the center out of the consolidated fund of India

c) The Commission decides the basis for sharing the divisible taxes by the centre and the states

d) in order to affix the resources of the state Panchayats and Municipalities, the finance commission evaluates the rise in the Consolidated Fund of a state

e) The finance commission has sufficient powers to exercise its functions within its activity domain.

Key roles

f) The main role of finance commission is to act as an instrument to divide the divisible taxes between the states and the Union government. It determines the allocation of taxes collected by the center.

g) It determines the principle of governing the federal grants of the revenues of states out of the consolidated fund of India.

h) Finance commission lays down the distribution of income tax between the union and the states.

i) Another important role is to focus on the financial relations between the state government and the central government.

j) Finance commission is an autonomous body to bring coordination and cooperation for smooth working of the federal system.

Q7) Explain the four stages of budget.

A7)

Indian budget process

The budget has four stages as follows

Stage 1 – Estimates of expenditure and revenues

Estimates of revenue – Revenue are capital and current receipts. Capital receipts includes repayment of loans given by the government, receipts from divestment of public-sector equity and borrowings—both domestic and external. Current receipts include mainly, tax revenues, receipts by way of dividends from public-sector units and interest payments on loans given out by the central government. Revenue is calculated on the basis of existing rates of taxation and taking into consideration the likely growth and inflation rate over the ensuing fiscal year.

Stage 2 – First estimates of deficit

Stage 3 - Narrowing the deficit

Stage 4 – The budget

Q8) Explain financial control in India.

A8)

The third principle levied restriction on the power of Parliament to authorize expenditure. Except on demand by Ministers, Parliament cannot vote money for any purpose.

The fourth principle levied a similar restriction on the power of Parliament to impose taxation except upon the recommendation of the Executive, Parliament cannot impose any tax

Q9) Explain financial federalism and adjustment.

A9)

Financial Federalism under constitution

a) There should be two sets of governments, each with its independent spheres of administrative and legislative competencies.

b) Each set of government should have independent tax base.

c) There should be written constitution from which each side derives its legislative power.

d) In case of conflict, there should be a system of independent judicial courts to arbitrate between the center and the constituent units.

Features of federalism

a) Two or more levels.

b) Each levels has its own jurisdiction.

c) Each level jurisdiction is specified.

d) Fundamentals of constitution can’t be changed central level itself.

e) In the disputes of different level court work as an umpire.

f) Revenue sources of each level are specified.

g) Federalism has two objectives – safeguard and promote national unity, accommodation of regional diversity.

The systematic arrangement of dividing the powers of levying and collecting tax between the Centre and the state will enable coordination between union and the states.

Key takeaways –

Federalism means division of function and power between center and the states

Fiscal federalism deals with the division of governmental functions and financial relations among levels of government.

Financial adjustments in India

Methods of fiscal adjustments

Q10) Explain finance commission and financial control in India.

A10)

Qualifications of Finance Commission Chairman and Members

a) The four members should be qualified as high court judges.

b) President makes all appointment of the country.

c) As schedule by the parliament the members shall give part time or service to the commission.

d) The salary of the members is as per the provisions laid down by the Constitution.

e) The president of India specifies the tenure of the member of the finance commission. In some cases the members are also re appointed.

Function of finance commission

b) The principles governing the federal grants to the states by the center out of the consolidated fund of India

c) The Commission decides the basis for sharing the divisible taxes by the centre and the states

d) in order to affix the resources of the state Panchayats and Municipalities, the finance commission evaluates the rise in the Consolidated Fund of a state

e) The finance commission has sufficient powers to exercise its functions within its activity domain.

Key roles

k) The main role of finance commission is to act as an instrument to divide the divisible taxes between the states and the Union government. It determines the allocation of taxes collected by the center.

l) It determines the principle of governing the federal grants of the revenues of states out of the consolidated fund of India.

m) Finance commission lays down the distribution of income tax between the union and the states.

n) Another important role is to focus on the financial relations between the state government and the central government.

o) Finance commission is an autonomous body to bring coordination and cooperation for smooth working of the federal system

Financial control in India-

a) Parliament controls public finance which includes granting of money to the administration for expenses on public services, imposition of taxes and authorization of loans. Based on four principles the Indian Constitution devises elaborate machinery for securing parliamentary control over finances.

b) The first principles in the matters of finance regulate the constitutional relation between the Government and Parliament. The executive without the authority of parliament cannot raise money through borrowings or taxation.

c) The second principles in the financial matters regulate the relation between the two Houses of Parliament. The lokshabha has the power of raising money by tax or loan. The Rajya Sabha merely agrees to it and cannot revise or alter. Thus, financial powers have been concentrated in the Lok Sabha and the Rajya Sabha plays only a subsidiary role in this respect.

d) The third principle levied restriction on the power of Parliament to authorize expenditure. Except on demand by Ministers, Parliament cannot vote money for any purpose.

e) The fourth principle levied a similar restriction on the power of Parliament to impose taxation except upon the recommendation of the Executive, Parliament cannot impose any tax

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