Fiscal Economics _Federal Finance and Local Finance

1. FISCAL ECONOMICS
Dr. A. SATHEESH BABU
Assistant Professor, Department of Economics
VIVEKANANDA COLLEGE
(Residential & Autonomous –A Gurukula Institute of Life Training)
TIRUVEDAKAM WEST, MADURAI DIST– 625 234, TAMIL NADU

2. Unit -IV

3. FEDERAL FINANCE
• Federation
• The word Federation implies the union
of two or more states.
• There is a constitutional division of
powers, functions and recourses
between Central (Union) and State is
called as federation.
• Federal Government
Central or Union
Government
State Government

4. Federal Finance
• Federal Finance means the finance of
the Central as well as the State
Governments and the relation between
the two.

5. 1. Autonomy and Responsibility: This principle
implies that the Centre should not interfere in
the matters in the matters which are exclusively
in responsibility of the states.
2. Adequacy and Elasticity: This principle implies
that the resources of each State should be
adequate to meet the immediate need of the
present and should be elastic inorder to meet
the needs of the future.
3. Equity: This principle implies that the
contribution by different states towards common
burden should be on an equitable basis
4. Administrative Efficiency and Economy: This
principle implies that the taxes assigned to the
different states should be efficiently and
economically administered.
Principles of Federal Finance

6. 5. Integration and Coordination: This principle
implies that the whole financial system of a
federation should be well integrated with
coordination for smooth and efficient working.
6. Accountability: This principle implies that each
Government must be answerable and
accountable to the Legislative bodies with
reference to taxation, public expenditure etc.,
7. Uniformity: This principle implies that the
system of taxation and pattern of expenditure
should be uniform in all the states.
8. Fiscal Assess: This principle implies that the
resources should grow with the increase in
responsibilities inorder to meet the growing
financial needs.

7. 1. Tax Sharing : Under this method, the proceeds
of certain selected Central taxes are combined
into a single pool and then allocated percent
wise to different States on a pre-determined
basis.
2. Reallocation of Functions: Under this method,
the Central Government can very well be carried
out certain functions like reallocation of
resources inorder to relieve the State
Governments from the administrative burdens.
Methods of Financial
Adjustments between Centre
and State Governments

8. 3. State Contributions: Under this method, the
State Governments can contribute when the
Central Government is in need of large resource
and vice-versa.
4. Supplementary Levies: Under this method,
generally the principal tax is levied by the
Central Government and the supplementary tax
is levied by the State Government.
5. Grants-in-Aid: Under this method, inorder to
correct the imbalance between the revenues
and expenditures of the State Governments, the
Central Government may give grants-in-aid to
the State Governments.

9. Centre – State Financial Relations in India
Central Sources of Revenue

10. State Sources of Revenue

11. Taxes Levied and Collected by the Union, but
Assigned to the States

12. • Stamp Duties
• Excise Duties on medicinal and toilet preparation,
mentioned in the Union List
• Duties are leviable within any State specified in
Part C of the First Schedule
Duties Levied by the Union, but Collected and
Appropriated by the States
Taxes Levied and Collected by the Union, but the
Proceeds shall be Distributed between the Union
and the States
• Taxes on Income other than Agricultural income
• Union duties of excise on tobacco and other
goods manufactured in India except liquor and
narcotics drugs.

13. Finance Commission
• The Finance Commission of India is a
quasi judicial body.
• It is established under Article 280 of
the Indian Constitution.
• It was came into existence in 1951
under the Finance Commission Act of
1951.
• The Commission is appointed by the
President every five years.
• It consists of a Chairman and four
Members.

14. 1. Distribution of Net Proceeds of Taxes: It makes
recommendations to the President on the
distribution of net proceeds of taxes to be shared
between the Union and the States.
2. Governing of Grants-in-Aid: It makes
recommendations to the President on the principles
which should govern the Grants-in-Aid of the
revenues of the States out of the Consolidated Fund
of India.
3. Changes in the Financial Agreement: It makes
recommendations to the President on the
continuance or modification of any agreement
between the Union and the State.
4. Consideration of President’s Suggestion: It makes
recommendations to the President on any other
matter referred by the President in the interest of
sound finance.
Functions of the Finance Commission

15. Finance Commissions in India

16. Unit -V

17. LOCAL FINANCE
• Local Government / Body
• The Bottom level administration of
villages, towns, cities and districts are
called as Local Governments or Local
Bodies.
• The administration of such
administration is called as Local
Administration.

18. • Local Governments / Bodies
Village Panchayat
Panchayat Union /Samiti
Zilla Parishad /District Board
Municipality
Municipal Corporation

19. Differences Between National
Finance and Local Finance
S.No. Basis National Finance Local Finance
1 Needs of
Citizens
Satisfies the higher level
needs of the people.
Satisfies the local level
needs of the local
people.
2 Taxation
Basis
Taxation of Central
Government is broad in
basis.
Taxation of Local
Government is narrow
in basis.
3 Principle of
Taxation
The taxation is based on
the principle of ability to
pay.
The taxation is based
on the principle of
benefit.
4 Area of
Operation
The Central Government
has wide area of
operation.
The Local
Governments have
limited area of
operation.

20. S.No. Basis National Finance Local Finance
5 Use of Tax
Collections
The taxes collected by
the Central Government
are used for welfare of
the people of the Nation
as a whole.
The taxes collected by
the Local Government
are used for welfare of
the people of the
particular area only.
6 Nature of
Taxes
The taxes of the Central
Government is uniform
in nature for all over the
country.
The taxes of the Local
Government is not
uniform in nature.
7 Borrowing The Central Government
can borrow loans both
internally and externally.
The Local Government
can not borrow loans.

21. Village Panchayat
• The Village Panchayat System was
found from olden days.
• A Village Panchayat is for one village or
a small number of villages.
• The members and President of the
Panchayat are elected by the people
directly.
• Functions of Village Panchayat
Obligatory Functions Discretionary Functions

22. • Construction, repair and maintenance of all
village panchayat roads
• Lighting of public roads and public places in
built up area
• Cleaning the streets, removal of rubbish
heaps, provision and maintenance of public
letrines
• Opening and maintenance of burial and
burning grounds
• Provision and maintenance of water supply for
washing and bathing purpose
• Such other duties as the Government by
notification impose.
A) Obligatory Functions
Functions of Village Panchayat

23. • Planting and preservation of trees on the
sides of the all public roads in the panchayat
area.
• Lighting of public roads and public places
other than built up areas.
• Opening and maintenance of public markets
• Control of fairs and festivals classified as
panchayat’s fairs and festivals
• Opening and maintenance of public landing
places, halting places, cart stands and public
cattle sheds
• Opening and maintenance of public slaughter
houses
B) Discretionary Functions

24. • Opening and maintenance of reading rooms
• Establishment and maintenance of wireless
receiving sets, play grounds, parks, sports
clubs and centres of physical culture
• Opening and maintenance of literacy centres
and centres for imparting social education
• Construction of works of public utility and
provisions of other facilities for the safety,
health, comfort, convenience, culture or
recreation of the inhabitance of the village
B) Discretionary Functions

25. 1. Taxes and Duties: It includes tax on
properties, cess on land, professional tax,
vehicle tax, service tax, theatre and show tax,
cess on use of rivers, tanks, wells etc., and
Octroi duty
2. Fees and Licences: It includes Animal licence,
exhibition licence, rest house fee, drainage
fee, library fee, lighting rate, water rate and
tolls come under this category
3. Income from Properties: It consists of rents
from panchayat properties, markets, buildings,
sale of trees in public places
4. Grants-in-Aid: The Central or State
Governments of Panchayat Unions give Grants-
in-Aid to Village Panchayats.
Revenue Resources of Village Panchayat

26. Panchayat Union / Samiti
• It was introduced on 02-10-1952
• The Panchayat Union covers many
village panchayats.
• The Head of the Union, called Chairman
was elected by the Presidents of the
Village Panchayats
• At Present, the Chairman of the
Panchayat Union has been elected by
the Union Council of Members.
• The Block Development Officer was the
Head of the Administration

27. Functions of Panchayat Union / Samiti
• Community Development Programmes
• Samiti level plan activities
• Rural self-sufficiency programmes
• Integrated Rural Development Programme, etc.,
• Establishing and maintaining of
• Primary Educational Institutions
• Primary Health Centres,
• Maternity and Child Welfare Clinics
• Water Supply and Sanitation
• Analysing and Approving of Budgets of Panchayats, etc.,
Development Functions
Specific Functions

28. 1. Taxes: It includes tax on properties, cess on
land, professional tax, vehicle tax, service tax,
theatre and show tax, cess on use of rivers,
tanks, wells etc., and Octroi duty
2. Fees and Licences: It includes Animal licence,
exhibition licence, rest house fee, drainage fee,
library fee, lighting rate, water rate and tolls
come under this category
3. Grants-in-Aid: The State Governments give
Grants-in-Aid to Panchayat Union. Funds are
available from Community Development
Projects, IRDP, etc.,
4. Loans: For Specific purposes, the loans are
received from the State Governments
Revenue Resources of Panchayat Union

29. Zilla Parishad / District Board
• Under Panchayat Raj System, it is the
Highest Organisation.
• For each Revenue District, there will be
One Zilla Parishad.
• The Head of the Zilla Parishad or
District Board or District Panchayat,
called Chairman was elected by the
District Council Members.
• The Collector was the Head of the
Administration
• In Tamil Nadu, Zilla Parishad is called
as District Panchayat

30. Functions of Zilla Parishad
• It prepares the District Development Plans
• It supervises the working of Panchayat
Unions/Samitis of the District
• It serves as a co-ordinating agency between
State and the Panchayat Union
• It advises the State Government on
implementation of development plans in the
jurisdiction
• It approves the budgets for Panchayat Union and
periodically reviews it’s functions
• It undertakes specific executive functions like
establishing and maintaining secondary,
vocational and industrial schools, public roads,
libraries, parks, fairs, village planning etc.,

31. 1. Taxes: It includes property tax and other taxes
approved by the State Government, cess on
land tax, etc.,
2. Fees : It includes tolls, share in various fees
collected by the Unions, fees collected in fairs,
markets, exhibition come under this category.
3. Grants-in-Aid: It includes grants received from
the State Government, State help in non-plan
expenditure, grants from the Central
Government for implementing schemes
relating to local development works.
Revenue Resources of Zilla Parishad

32. Municipality
• The Municipality is the organ to look
after the administration of a town.
• The Council Members are elected by
the people.
• The Head of the Municipality, called
Chairman was elected by the Council
Members.
• The Commissioner was the Head of the
Administration

33. Functions of Municipality
• Providing essential services like street lighting,
water supply, drainage system, etc.,
• Maintaining hospitals, dispensaries, veterinary
hospitals and other health and sanitation
measures
• Providing primary and secondary education
facilities
• Construction and maintenance of local roads,
parks, gardens, playgrounds, burial grounds,
slaughter houses and other municipal buildings
• Registration of Births and Deaths
• Establishing reading rooms and libraries
• Looking after town planning, street cleaning,
markets etc.,

34. 1. Direct Taxes: It includes Property tax,
Professional tax, Pilgrims tax, Conservancy tax
and Tax on vehicles and animals etc.,
2. Indirect Taxes: It includes Octroi, Show tax or
Theatre Tax etc.,
3. Revenue from Commercial Undertakings: It
includes the revenue from the supply of water
service, lighting service, rent for municipal
buildings etc.,
4. Grants-in-Aid: The State Governments give
Grants-in-Aid to Municipalities inorder to
execute the development service-oriented
functions etc.,
5. Loans: The Municipalities get loans mainly from
the State Government.
Revenue Resources of Municipality

35. Municipal Corporation
• Very big cities have Municipal
Corporation.
• The members called Councilors are
elected by the people directly.
• The Head of the Municipality, called
Mayor was elected by the Councilors.
• The Commissioner was the Head of the
Administration

36. Functions of Municipal Corporation
• Maintaining hospitals, dispensaries, veterinary
hospitals and other health and sanitation
measures
• Providing primary and secondary education
facilities and housing facilities
• Providing essential services like street lighting,
water supply, drainage system, etc.,
• Construction and maintenance of local roads,
parks, gardens, playgrounds, burial grounds,
slaughter houses and other municipal buildings
• Establishing reading rooms and libraries
• Looking after town planning, street cleaning,
markets etc.,
• Registration of Births and Deaths

37. Revenue Resources of Municipal Corporation
1. Direct Taxes: It includes Property tax,
Professional tax, Pilgrims tax, Conservancy tax
and Tax on vehicles and animals etc.,
2. Indirect Taxes: It includes Octroi, Show tax or
Theatre Tax, Advertisement tax etc.,
3. Revenue from Commercial Undertakings: It
includes the revenue from the supply of water
service, lighting service, rent for municipal
buildings, Business Complexes, Markets etc.,
4. Grants-in-Aid: The State Governments give
Grants-in-Aid to Municipalities inorder to fill up
the revenue gap and execute the functions etc.,
5. Loans: The Municipalities get loans mainly from
the State Government and IBRD etc.,

38. Problems of Local Finance
• Uneconomical Service Area
• More Functions
• Inadequate Financial Resources
• Benefit Principle of Taxation
• Change of Functions and Resources
• No scope for new Sources of Revenue
• Inadequate Grants-in-Aid
• No Autonomy

39. Suggestions to Solve the
Problems of Local Finance
• Viable Service Area to be created
• Increasing Revenue Resources
• Grants-in-Aid to be liberal
• Panchayat Raj Corporation to be established
• Minor Local Enterprises to be started
• Periodically revenue adjustments to be done
through Central/State Finance Commission

40. Thank you