Principles of Federal Finance

Economics Uncategorized

In the case of federal system of finance,
the following main principles must be

1. Principle of Independence.
2. Principle of Equity.
3. Principle of Uniformity.
4. Principle of Adequacy.
5. Principle of Fiscal Access.
6. Principle of Integration and coordination.
7. Principle of Efficiency.
8. Principle of Administrative Economy.
9. Principle of Accountability.

1. Principle of Independence:
Under the system of federal finance,a Government should be autonomous and free about the internal financial matters concerned. It means each Government should have separate sources of revenue,authority to levy taxes, to borrow money and to meet the expenditure.The Government should normally enjoyautonomy in fiscal matters.

2. Principle of Equity:
From the point of view of equity, theresources should be distributed among the
different states so that each state receives a
fair share of revenue.

3. Principle of Uniformity:
In a federal system, each state should contribute equal tax payments for federal
finance. But this principle cannot be followed in practice because the taxable capacity of each unit is not of the same.

4. Principle of Adequacy of Resources:
The principle of adequacy means that the resources of each Government i.e. Central and State should be adequateto carry out its functions effectively. Here adequacy must be decided with reference to both current as well as future needs.Besides, the resources should be elastic in order to meet the growing needs and unforeseen expenditure like war, floods

5. Principle of Fiscal Access:
In a federal system, there should be possibility for the Central and Stateq Governments to develop new source of revenue within their prescribed fields to meet the growing financial needs. In nutshell, the resources should grow with the increase in the responsibilities of the Government.

6. Principle of Integration and coordination:
The financial system as a whole should be well integrated. There should be perfect coordination among different layers of the financial system of the country. Then only the federal system will survive. This should be done in such a way to promote the overall economic development of the country.

7. Principle of Efficiency:
The financial system should be well organized and efficiently administered.There should be no scope for evasion and fraud. No one should be taxed more than once in a year. Double taxation should be avoided.

8. Principle of Administrative Economy:
Economy is the important criterion of any federal financial system. That is,the cost of collection should be at the minimum level and the major portion of revenue should be made available for the other expenditure outlays of the Governments.

9. Principle of Accountability:
Each Government should be
accountable to its own legislature for its
financial decisions i.e the Central to the
Parliament and the State to the Assembly.

History of Finance Commission:

 Finance commission is a quasi-judicial body set up under Article 280 of the Indian Constitution. It was established in the year 1951, to define the fiscal relationship framework between the Centre and the state.
 Finance Commission aims to reduce the fiscal imbalances between the centre and the states (Vertical imbalance) and also between the states (horizontal imbalance). It promotes inclusiveness.
 A Finance Commission is set up once in every 5 years. It is normally constituted two years before the period.It is a temporary Body.
 The 14th Finance Commission was set up in 2013.Its recommendations were valid for the period from 1st April 2015 to 31st March 2020.
 The 15th Finance Commission has been set up in November 2017. Its recommendations will be implemented starting 1 April 2020.

Functions of Finance Commission of India:

Article 280 (3) speaks about the functions of the Finance Commission.The Article states that it shall be the duty of the Commission to make the recommendations to the President as to:
1. The distribution between the Union and the States of the net proceeds of taxes, which may be divided between them and the allocation among the states of the respective shares of such proceeds;
2. To determine the quantum of grants-in-aid to be given by the Centre to states [Article 275 (1)] and to evolve theprinciples governing the eligibility of the state for such grant-in-aid; 3. Any other matter referred to the Commission by the President of India in the interest of sound finance. Several issues like debt relief, financing of calamity relief of states, additional excise duties, etc. have been referred tothe Commission invoking this clause.

Leave a Reply