Centre–State financial relations in India refer to the fiscal interactions between the central government and the state governments, encompassing the allocation of resources, revenue sharing, and financial transfers. These relations are governed by constitutional provisions, statutory frameworks, and various institutional mechanisms aimed at ensuring fiscal federalism. The primary objective is to ensure an equitable distribution of financial resources to enable both levels of government to fulfill their respective responsibilities and developmental goals effectively.

India’s fiscal federalism is rooted in the Constitution, which delineates the financial powers and responsibilities of the centre and the states. This framework is designed to balance the financial needs and autonomy of states with the overarching fiscal authority of the central government. The dynamic nature of centre–state financial relations reflects the evolving economic and political landscape of the country, requiring continuous adaptation and cooperation between the centre and the states to address fiscal challenges and promote balanced regional development.

Fiscal federalism refers to the financial relationship between different levels of government in a federal system, typically involving the central (national) government and subnational governments (states, provinces, or regions). In India, fiscal federalism encompasses the distribution of financial powers and responsibilities between the central and state governments, aimed at ensuring an efficient and equitable allocation of resources, promoting regional development, and maintaining macroeconomic stability.

Principles of Fiscal Federalism

1.Revenue Assignment

i.Tax Powers: The Constitution of India delineates the tax powers between the centre and the states. The central government has the authority to levy taxes on income (except agricultural income), customs duties, excise duties, and service taxes. States have the power to levy taxes on agricultural income, land, buildings, sales of goods (excluding inter-state sales), and excise duties on alcoholic beverages. Additionally, with the implementation of the Goods and Services Tax (GST) in 2017, a significant portion of indirect taxes has been subsumed under a unified tax regime shared by both the centre and the states.

ii.Non-Tax Revenue: Both levels of government can generate non-tax revenue through fees, charges, and income from public enterprises. For instance, states earn revenue from state lotteries, mineral resources, and irrigation facilities, while the central government earns from telecommunications and railways.