Que. There has been a growing demand for increasing tax transfers from the Union to the States in recent years. In this context, examine the implications of increasing the share of net income to 50% as a means of eliminating vertical fiscal imbalances in India.

प्रश्न: हाल के वर्षों में संघ से राज्यों को कर हस्तांतरण में वृद्धि की मांग में अत्यधिक तेज़ी आई है। इस सन्दर्भ में, भारत में ऊर्ध्वाधर राजकोषीय असंतुलन को समाप्त करने के साधन के रूप में शुद्ध आय का हिस्सा 50% तक बढ़ाने के निहितार्थों की जांच कीजिए।

Introduction

Revenue distribution is a key issue in India’s federal structure. According to the principle of fiscal federalism, tax revenue should be equitably shared between the Union and the States. However, the imbalance between the revenue and expenditure responsibilities of the states leads to fiscal imbalance, termed as vertical fiscal imbalance. To address this, there has been a growing demand for increasing the tax transfers from the Union to the States, suggesting that states’ share of net income be raised to 50%.

Vertical Fiscal Imbalance and its Effects

(i) Unequal Revenue Distribution: Under the Indian Constitution, states have greater expenditure responsibilities compared to their income. Most major taxation powers, such as income tax, corporate tax, and the central portion of GST, are vested with the Union.

(ii) Limited Financial Autonomy of States: Factors such as Union transfers and rising share of centrally-sponsored schemes limit the financial autonomy of states, affecting their ability to make independent decisions.

(iii) Developmental Responsibilities: States face large expenditures in areas like health, education, agriculture, and rural development, but lack adequate resources, which hampers their developmental initiatives.

Implications of Increasing Net Income Share to 50%

(i) Increased Fiscal Capacity of States: If the Union increases the states’ share of net income to 50%, the states will have more resources for developmental and welfare programs, improving their financial autonomy and allowing them to plan based on their local priorities.

(ii) Reducing Regional Disparities: More fiscal independence would enable states to allocate resources according to their local needs, reducing regional inequalities and promoting balanced growth, especially in backward regions.

(iii) Strengthening Fiscal Federalism: Increasing tax transfers will improve the financial relationship between the Union and the States, strengthening the federal framework and promoting fiscal federalism as a sustainable and effective system.

(iv) Independent Planning and Decision-Making: States will have sufficient financial resources, enabling them to implement their plans and projects without relying on central grants or intervention, thereby accelerating their planning and implementation processes.

(v) Reduced Burden on Finance Commission: With increased tax transfers, the Union’s role in the Finance Commission’s recommendations may decrease, reducing the states’ dependence on central grants and lightening the financial burden on the Union government.

Challenges and Concerns

(i) Impact on Union’s Financial Obligations: Increasing states’ share of net income could reduce the Union’s resources for critical sectors like defense, national security, and public infrastructure, potentially affecting national priorities.

(ii) Lack of Fiscal Discipline in States: There is concern about the fiscal management and accountability of states when given more financial resources. Poor financial discipline in some states could lead to higher deficits and fiscal mismanagement.

(iii) Economic Disparity: Not all states have the same financial strength. Equal distribution of tax revenue could benefit some states, while financially weaker states may lag in development despite receiving additional funds.

(iv) Impact on Union Schemes: If more tax is transferred to the states, central schemes and projects of national importance could face budget cuts, affecting nationwide initiatives.

Conclusion

Increasing the states’ share of net income to 50% could help address vertical fiscal imbalance by enhancing fiscal autonomy, reducing regional disparities, and strengthening fiscal federalism. However, this must be balanced with concerns related to fiscal discipline, the Union’s financial obligations, and regional inequalities. A coordinated approach between the Union and the States is essential to ensure overall national development while maintaining the fiscal balance in India’s federal structure.