The division of taxation, spending, and financial powers between the central government and the states in a federal system, and the arrangements for sharing and transferring funds between them.
- In India the Constitution divides taxing and spending powers through the Union, State, and Concurrent Lists of the Seventh Schedule; see concept seventh schedule.
- A vertical imbalance arises because the centre raises most of the buoyant taxes while the states carry heavy spending responsibilities, so transfers are needed.
- The Finance Commission, a constitutional body under Article 280, recommends how central tax revenue is shared with and among the states; see concept finance commission.
- Transfers flow through tax devolution, grants-in-aid, and centrally sponsored schemes; the Goods and Services Tax added a shared, council-governed tax (see concept gst council).
- Key tensions include the centre's larger fiscal muscle, the design of devolution, and demands for greater state autonomy.
The idea (constitutional sharing of fiscal powers, vertical imbalance, the Article 280 Finance Commission) bridges polity and economy and is frequently tested.
Fiscal federalism is the whole framework of dividing and transferring money between centre and states; the Finance Commission (Article 280) is the body that recommends the sharing, not the framework itself.
The centre-state division of taxing and spending powers and the transfers between them, with the Article 280 Finance Commission as the key sharing body.