Federal Structure of India Types, Features And Important Details

1. Division of Powers: Powers are categorized into Union, State, and Concurrent Lists, specifying legislative domains for the central and state governments.
2. Dual Government Polity: India operates with a dual-level governance system—central government overseeing the entire nation and state governments managing specific regions.
3. Independence of Judiciary: The integrated judiciary, led by the Supreme Court, interprets the Constitution and resolves disputes between the central and state governments.
4. Dual Citizenship: Indian citizens possess dual citizenship, recognized at both the national and state levels.
5. Bicameralism: The Parliament, comprising the Lok Sabha and the Rajya Sabha, mirrors a bicameral structure found in various state legislatures.
6. Supremacy of the Constitution: The Constitution stands as the highest law, guiding and empowering both central and state governments.
7. Governments at Two Levels: Coexistence of central and state governments allows each level to independently manage and legislate within its jurisdiction.

Government Responsibilities at Different Levels

Know how various tiers of government in India carry out their designated responsibilities. It elucidates the execution of governmental duties through the implementation of diverse development schemes, programs, and expenditures, categorizing these into Schematic/Programmatic Expenditure and Non-Schematic Expenditure.

Schematic/Programmatic Expenditure

Government expenditures occurring within structured schemes or programs, varying in scale, fall under schematic/programmatic expenditure. This includes initiatives like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). These schemes are classified based on the level of government funding into three categories:

1. Central Sector Schemes: Governed, implemented, and funded directly by the Central Government, primarily concerning sectors in the Union list.
2. Centrally Sponsored Schemes: Involving shared funding between the State and Central Governments, reflecting the federal structure. These schemes may have a national or regional character.
3. State Schemes: Focused on sectors within the State list, formulated, implemented, and entirely funded by the State Government.

Centrally Sponsored Schemes

Centrally Sponsored Schemes are further classified into:

• Core of the Core Schemes: Six crucial schemes, including the National Social Assistance Programme (NSAP) and Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).
• Core Schemes: Comprising 20 other schemes with varying fund-sharing ratios between the Centre and State Governments.
• Optional Schemes: Two schemes with distinct funding ratios based on geographical locations.

Non-Schematic/Programmatic Expenditure

This category includes expenditures not related to specific schemes or programs and comprises three major components:

1. Establishment/Administrative Expenditure: Covering various expenses related to the functioning of government offices and departments.
2. Expenditure on Public Sector Enterprise and Other Autonomous Bodies: Encompassing costs incurred on government-owned enterprises and autonomous bodies.
3. Transfers and Other Expenditure: Involving financial transfers from the Union Government to States and vice versa, including items like interest payments, debt repayment, and contributions to international organizations.

Powers to Raise Resources Across Government Tiers

Similar to the distribution of responsibilities, the authority to generate resources is divided among the three tiers of government. Receipts are categorized into Tax Revenue and Non-tax Revenue. Tax Revenue involves money collected through legislatively imposed payments, while Non-tax Revenue comprises revenue from sources other than taxes, such as fees, dividends, and profits. Key sources of revenue under both categories are discussed below.

Tax Revenue

Major taxes currently levied or imposed in the recent past include:

1. Personal Income Tax: Imposed on individuals, firms, etc., excluding companies under the Income Tax Act, 1961.
2. Corporate Income Tax: Levied on registered companies/corporations operating in India.
3. Union Excise Duty: A production tax on domestically manufactured goods for domestic consumption.
4. Service Tax: Imposed on services provided by entities or individuals.
5. Goods and Services Tax (GST): Introduced in 2017, it amalgamates various Central and State taxes into one indirect tax, applicable to goods and services.
6. Stamps and Registration Duty: Charged on property sale and transfer.
7. Motor Vehicles Tax: Levied by states on motor vehicles under their Motor Vehicles Taxation Act.
8. Property Tax: Imposed by local bodies on immovable property.
9. Entertainment Tax: Generally applied to movie tickets, amusement parks, and other entertainment activities.

Distribution of Tax Revenue

The GST Council, with representation from both Union and State Governments, oversees the governance of GST.

Sharing Tax Revenue Among the Three Government Tiers in India

As previously mentioned, various levels of government in India wield distinct taxing powers. The collected tax revenue from the Central and State governments is distributed among the three tiers of government to ensure equitable resource allocation among the states. Without such a mechanism, developed states might dominate in raising more taxes, exacerbating interstate inequality as they invest those taxes in development projects. To counteract this, certain taxes are levied by the Central Government and then shared with the State Governments. Revenue generated through cess or surcharge directly contributes to the Central Government.

Divisible Pool and Recommendations of the Finance Commission

The Central taxes and the Central Goods and Services Tax (CGST) constitute the divisible pool, shared between the Centre and States as per the recommendations of the Finance Commission, a body constituted every five years. Integrated Goods and Services Tax (IGST), applicable to inter-state transactions, is also shared equally between the Centre and States. The portion of IGST collected by the Centre is included in the divisible pool. The Central Government, responsible for collecting revenue from the divisible pool, adheres to the Finance Commission's recommendations. In the fiscal year 2021-22, 41% of the divisible pool is allocated to the States, with the remaining 59% allocated to the Centre.

Distribution of GST Components

• The State Goods and Services Tax (SGST) component of GST goes directly to the States.
• State taxes are directed to State Governments.
• Local taxes are allocated to Local Governments.
• Local Governments also receive a share of resources from the State Governments, determined by the recommendations of the State Finance Commission.

Role of the Central Finance Commission

Due to a mismatch between the resource-raising and spending capacities of the three tiers of government in India, the Central Finance Commission is appointed every five years by the President of India. This Commission advises on how financial resources should be distributed between the Centre and the States, with a significant focus on sharing revenue from the Central Tax System. The funds devolved to States from central taxes are untied, allowing States discretionary usage.

Evolution of Tax Distribution Mechanism

• The Finance Commission, established under Article 280 of the Constitution, originally shared only Income tax and specific Union excise until the constitutional amendment in 2000.
• Subsequent amendments in 2000 and 2003 expanded the scope to include all central taxes shared with States.

15th Finance Commission Recommendations

• During the 14th Finance Commission (2015-16 to 2019-20), 42% of the shareable/divisible pool of Central tax revenue was transferred to States annually.
• The 15th Finance Commission (2020-21 to 2024-25) suggested a decrease to 41%, with the 1% reduction allocated for the newly formed Union territories of Jammu and Kashmir and Ladakh from the resources of the Central Government.

Role of the Fifteenth Finance Commission in Resource Allocation

The Fifteenth Finance Commission has presented its inaugural report, mirroring the formula set for its final report covering the period from 2021 to 2026. The outlined criteria in the table below are elucidated as follows:

1. Income Distance: Measures the gap between the State with the highest per capita State Gross Domestic Product (GSDP) and any specific State. The calculation utilizes the per capita income of Goa, Sikkim, and, for larger representation, Haryana.
2. Population (1971): The population of States estimated from the 1971 census.
3. Population (2011): The population of States estimated from the 2011 census, reflecting the latest Census data as mentioned in the new terms of reference (TOR).
4. Area: The geographical area of the State.
5. Forest Cover: The percentage of the State's geographical area covered by forests.
6. Forest and Ecology: Modified criteria considering the impact of forests on a State’s resources and costs.
7. Demographic Performance: Rewards States for effective population control, using the fertility rate as the indicator.
8. Tax Effort: Measures a State's ability to collect its tax revenue in relation to its GSDP, aiming to reward efficient tax collection.

All indicators are rooted in three principles: Need and Cost, Equity, and Performance. Population, area, and forest ecology represent Need and Cost, Income distance embodies Equity, while Demographic performance and tax effort signify Performance.

Resource Transfers from Union to State Governments

The total Union Government resource transfers to States encompass untied resources determined by the Central Finance Commission (States’ share in Central taxes and Grants), and Plan Grants covering funds for Centrally Sponsored Schemes. The Central Finance Commission recommends various non-plan grants, including the 'Post-Devolution Revenue Deficit Grant' and the 'Local Bodies Grant,' designed to address revenue deficits and support local governance.

Components of Constitutionally Determined Transfers

1. State’s Share in Central Tax
2. Revenue Deficit Grant
3. Local Bodies Grant
4. Specific Purpose Grant and Sectoral Grants

These components, determined by the Constitution, constitute the constitutionally defined transfer of resources from the Union Government to State Governments. The remainder is at the discretion of the Central Government.

Notably, the State's share of Central taxes is excluded from the Union Budget's expenditure (Consolidated Fund of India) when funds are allocated across Union Ministries/Departments.

Role of Cesses and Surcharges

In the distribution of tax revenue between Union and State Governments, the prominence of cesses and surcharges has increased. While part of tax collections, these are not included in the divisible pool of resources, hence not shared with the States.

Grants-in-Aid

Grants-in-Aid are provided from higher to lower tiers of Government. The Union Government offers these to States and Local Bodies without expecting repayment. There are two types: Statutory Grants (based on Central Finance Commission recommendations) and Discretionary Grants (discretionary allocations for public purposes).

Non-Tax Revenue Sources

Non-tax revenue, earned by the Government from sources other than taxes, is charged against services provided. Key sources include:

Union Government

• Interest Receipt
• Dividends and Profits
• Petroleum License
• Power Supply Fees
• Fees for Communication Services
• Broadcasting Fees
• Road, Bridge Usage Fees
• Sale of Stationery, Gazettes, etc.
• Fee for Administrative Services
• Currency, Coinage, and Mint
• Other Non-Tax Receipts

State Governments

• Interest Receipt
• Licensing Fee for Mineral Exploration
• Fee levied in relation to Forestry
• Other Non-Tax Revenue

Local Bodies

• Grants
• License Fee
• Gate Fees
• Income from Property (Rent)
• Income from Property other than Rent
• Permit Fees
• Registration Fees
• Service Charges