Essay on the centre-state financial relations with the recommendations of the sarkaria commission

The political autonomy of the constituent units of a federation can’t be deemed complete unless they enjoy financial autonomy but such a thing hardly exists in any federation of the “world, The essence of a federation is the distribution of functions but no state can function.

The distribution of the sources of revenue between the centre and the state is as follows:

(1) Taxes levied by the union but collected and wholly retained by the states:

Stamp duties in respect of Bills of exchange, cheques, promissory notes, letters of credit, policies of insurance, transfer of shares and excise on medicines and toilet preparations containing alcohol.

(2) Taxes levied and collected by the union but whose proceeds are given over to the states:

Duties in respect of succession to property, other than agriculture land, estate duty on property, terminal taxes on goods and passengers, taxes on railways fares and freights, taxes on the sale or purchase of news papers and advertisements published their in and so on.

(3) Taxes levied and collected by the union but whose proceeds are shared between the union and the states. Income tax is the only item which comes under this head. The ratio in which the proceeds from this tax are shared between the union and the states is decided by the president after considering the report of the finance commission.

(4) Taxes which are levied and collected by the Government of India but whose proceeds may be distributed among the states in accordance with such principles as may be formulated by a union law. Under this head come union duties of excise other than those on medical and toilet preparations.

Grant-in-aid:

Besides the distribution of sources of revenue, the constitution also makes provision for certain grants-in-aid of the states from the union fund. The union levies and collects the proceeds on export duty on jute and jute products. Out of the receipt, a grant-in-aid is given to the state of Assam, Bihar, Orissa and West Bengal.

The parliament is also empowered to the parliament also discharge its duty towards the scheduled castes and backward tribes, can finance any state scheme for the welfare of those tribes and scheduled areas.

Recommendations of the Sarkaria Commission:

The Commission on centre state Relations has critically examined the view of the states and made following recommendations.

(1) Under the present circumstances, duties on all the items covered by Act. 268 don’t appear to be a buoyant source of revenue amendable by frequent revisions.

The revenue raised from these duties should be separately specified in the budget and other relevant publications.

(2) The monetary limit of Rs. 250 per annum fixed 31 years ago on taxes that can be levied on profession, trades, calling and employment should be in consultation with the states, revised upwards immediately and revised periodically.

(3) Taxation of agricultural income is a sensitive matter. Both the union and the state Governments aren’t inclined at present for a change in the constitutional provision in regard to entry 46 of list-II.

(4) By an appropriate amendment of the constitution, the net proceeds of corporation tax maybe made permissibly sharable with the states, if and as parliament may by law so provide. It being an elastic resources, the states would benefit forms its growth.

(5) The surcharge on income tax shouldn’t be levied by the union Government except for a specific purpose and for a strictly limited period.

(6) It is necessary that a comprehensive paper on direct, indirect and cross subsidies, coverly both union and state Government is prepared by the planning commission every year and brought up before NEDC for discussion.

(7) The finance commission cell Division proposed to be located in the planning commission should continuously monitor the behaviour of states finance. The planning commission would then be able to bring before the NEDC annual reviews indicating among other thing, the deviations from the forecast of finance commission and the reasons for the same.

(8) The Finance Commission Division should, in co-operation with the states, organize comprehensive studies on trends in growth of public expenditure in the states in the light of findings of the previous finance commission.

(9) Finance Commission should draw experts for assisting then in their work from various parts of the country.

(10) State Planning and Finance Broads may be set up at state level to take an objective view of resources to be devolved to the districts.

(11) The Eighth finance commission’s final recommendations were not implemented in 1984-85 which caused serious financial problems in some states while the recommendations of the finance commission aren’t binding on the union Government in a technical sense, the expectation is that, as far as possible, these would not be departed from without compelling reasons.

(12) The scope for raising additional resources to any considerable extent on items covered by Act 269 appears to be limited. An expert committee should be constituted to enquire into and review from time to time, in consultation with state, the operational feasibility of the scope for levying taxes and duties including in Act. 269 and the complementary measures the state Governments would be required to take.

(13) The constitution should be suitably amended to ad the subject of taxation of advertisement, broadcast by radio or television to the present entry 92 list I and Act. 269 (1) (7).

(14) The union Government should signify its acceptance of the finance commissions recommendation in regard to the grant in lieu of the Railways passenger fare tax also.

(15) The finance commission takes into account the expenditure liability of the states with respect to dearness allowance, etc. and make a provision for the same. But the inflation increases both outlays and revenues. The permanent secretariat of the finance commission should make an annual review of the situation.

(16) The review of royalty rates on minerals, petroleum and natural gas should be made every two years and well in time, as and when they fall due.

(17) The distinction made by the seventh and eighth finance commission in providing a more favourable flow of central assistance for floods, cyclones etc. and a draught situation may continue.

(18) The central team to the damage caused by nature calamities should invariably be headed by the Advisor in Charge of that state in the planning commission, as was the practice in the part.

(19) In a calamitous situation, the states should have a reasonable discretion to make inter district or inter sectorial adjustments. Relief assistance should extend beyond the financial year. The assistance required till the next June / July should be decided in the beginning itself so that relief work can be properly -planned and executed.

(20) The flow of capital fund from various sources to the states and their allocation among them should form part of an integrated plan.

This task may be attended to by the planning commission in consultation with the ministry of finance and the Reserve Bank of India and got approved by the NEDC as part of plan financing.

The sarkaria commission’s recommendations with respect to financial relations between the union and the states constitute the most important part of all the recommendations.

The commission has taken favourable view on the demand of the states to have more financial resources at their disposal. Inclusion of corporation tax in the divisible pool will go a Long way in easing the resource problem of the states.

At the same time the suggestion to periodically review and explore the revision or imposition of duties covered by Act. 268 will also make available more resource to the states.

Taking an overall view we can say that the Sarkaria commission has recommended and appropriate feeler – financial structure encompassing diverse factors like more resources devolution for the states maintaining strict” financial discipline on the part of the union and states.