FINANCE Commissions are appointed not only to work out a framework to allocate tax and duty collections among the States but also to help them cover their non-Plan revenue deficit by devolution of grant-in-aid.
Recently, the revenue deficits of States have grown alarmingly, financing more than 21 per cent of the States' revenue expenditure. The ratio was just 8 per cent in 1990-91. The combined revenue deficits contributed more than 60 per cent to their gross fiscal deficit in 1999-2000, compared to about 30 per cent in 1990-91.
Thus revenue deficits have been eating up a good part of State government resources and have increased their dependence on grants-in-aid from the Centre. The principal function of the Finance Commission has been to recommend some method or model to transfer resources to the States from the collection of taxes and in the form of grants.
While the devolution of taxes and duties collected shows a fiscal relationship between Central and State governments, confirming the claims and rights of the States, grants in aid are assistance to them for covering a non-Plan revenue gap under article 275(1). The …