Fiscal federalism needs a look-in by the 16th Finance Commission

Source– The post is based on the article “Fiscal federalism needs a look-in by the 16th Finance Commission” published in live Mint on 30th June 2023.

Syllabus: GS2-Fiscal Federalism

Relevance: Appointment of The Sixteenth Finance Commission (16th FC)

News- The soon-to-be-appointed 16^th Finance Commission will have to tackle problems in Centre-state relations ,solve issues of centralization and delegation of funds to lower levels.

What are the challenging issues in Fiscal Federalism?

First, there is the intersecting domain of the Finance Commission and Goods and Services Tax (GST) Council. The latter’s decisions impact the own tax revenue flows of states and, more importantly, the size of the central tax revenue pool .

Second, the demands for greater centralization of expenditure assignment is another issue. India has a quasi-federal system. For purposes of legislation, regulation and administration, Schedule 7 of the Constitution assigns  47 subjects to the Concurrent List.

Third, there is the issue of externalities. If social benefits or losses can spill over across boundaries of a lower-level jurisdiction, it requires assignment of the subject to a higher-level jurisdiction with wider spatial coverage.

Fourth is the third tier of government.where it is left to the states to decide what functions from the state list in the 7th schedule should be further delegated and assigned to local governments.

Finally, equity considerations may require greater centralization to enable the provision of comparable levels of public or merit services for all citizens in a country.

What is Way forward?

Most of these problems haven been sorted out and GST has now emerged as a large and buoyant source of revenue for both the Centre and states.

Vijay Kelkar, chairman of the 13th FC, suggested that consolidated funds should be created for PRIs and ULBs, funded by earmarking a share of the central GST and state GST for them.

The capacity of local-level institutions should be strengthened

A change in the assignment of subjects under schedule 7, whether towards greater centralization or greater decentralization, will entail constitutional amendments.