The term federal has been derived from the Latin term ‘foedus’ which means treaty or agreement. Such treaty or agreement follows the merger of a number of separate states into a single sovereign State. The objective of agreement is to arrive at a compromise, among the interests of the central authority which comes into being as a result of merger of the states on the one hand and the various states which are transformed into constituent units of that political structure on the other hand.
In India before Independence, the remarkable feature of financial relations was that except for a brief period in the early twenties when the Provinces were required to make contributions to cover the Central budgetary deficits or shortage, it was mainly the Union Government which transferred resources to the Provinces to meet their expanding necessities. It had a unitary system of government and till the end of 19th Century the Provinces depended entirely on the Central Government for all their necessities. The provinces had neither the right to impose tax and raise resources nor to undertake expenditure on themselves. They were paid fixed cash grants called cash assignments for meeting their expenses which were reviewed from periodically. This arrangement was found to be unsatisfactory. Thereafter Provinces were given the right to collect revenues from law, forests and justice, public works, education, etc. which were of local origin. They were also given a share of certain Central taxes like excise duties, and income tax, stamps etc. This allocation came to be known as 'divided heads of revenue’. The method of paying cash assignments also continued. In the starting such ‘settlements’ were subjected to review every five years. The settlements with the provinces were made quasi-permanent in 1904, and permanent in 1912. This made the Provinces less dependent on the fluctuating grants from the Union.
Like in other countries, the financial or fiscal dimensions of federalism are a reflection of the political federal structure in India. The traditional subjects of concern of fiscal federalism such as the assignment of taxes and responsibilities as well as the correction of vertical and horizontal differences continue to remain significant in India. Devolution of duties and taxes still comprises the most significant dimension of fiscal federalism in India. As a paramount objective fiscal federalism is expected to enable the national and sub-national governments to operate in such a way that leads to efficiency in the use of resources not only in terms of the quality of services provided by the various levels of government but also in terms of creating the environment in which all economic agents use resources capably.
Cite this article:
Muhammad Riyazul Ameen Memon. Fiscal aspects of Federalism: Critiqal Appraisal of Relationship between Centre and States. Research J. Humanities and Social Sciences. 5(1): January-March, 2014, 26-28.