Indian constitution maker designed the fiscal policy keeping the mind the unity and integrity of the new nation. However 70 years down the time the fiscal federations need to be re looked and redesigned for the greater good of all.
The fiscal policy holds importance as taxation is not just a means. It raises revenue but it also critical for economic and political development. Taxation is the economic glue that kinds ofthe citizen to the state are a necessary two-way relationship. It enables the state to create a condition for prosperity and allow citizens to hold the Government.
Accountable:- particularly with direct tax.
However direct tax collection by Indian states and local Government are significantly lower and rely mostly upon devolutions and grants.
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Imbalances in Indian federation:-
- Tax system yields much grates revenue to central Government than state and local Government but responsibility on the state are higher. The share of the state in public expenditure is 60% while it is 40% for central.
- Vertical issue: GST needs to achieve the goal of single rate and direct tax collection by Central, State and Local Government need to redesign.
- Provision of basic goods and services.
- Transfer national capital deficit.
- Primarily due to Historical conditions.
- The basic provision of goods and service Finance commission and state finance commission are catering well to this balance.
- Transformational capital deficit—NITI Aayog can play a significant to bridge the gap by allocating its necessary resources.eg: 1-2% of GDP.
- Local Government forms the basis of decentralization. Consolidated fund of 3rd tier can be constituted to reduce the intrastate regional imbalances.
Thus, fiscal federalism can be truly achieved with redesigning of fiscal policies in proportion with the responsibilities held by Centre, state and local Government.