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The commission is constituted to make recommendations to the president about the distribution of the net proceeds of taxes between the Union and States and also the allocation of the same among the States themselves. It is also under the ambit of the finance commission to define the financial relations between the Union and the States.
The distribution of net proceed of taxes between union and states which are to be divided under chapter 1 part 12 of the constitution. The policies required to increase the consolidated fund of states on the basis of recommendation made by the finance commission of states to supplement the resources of municipalities and panchayats in the state.
On account of Tax Sharing between the Centre and the State and allocation of Income Tax and Central Excise Duties; Under Article 275 of the Indian Constitution, Grants-in-Aid to States in need of assistance, other than the sums specified in the provisos to Clause 1 of article 275 With regard to the requirements of third five-year plan
In this context, the Sarkaria Commission on Centre–State Relations (1983–87) observed: “The rule of federal supremacy is a technique to avoid absurdity, resolve conflict and ensure harmony between the Union and state laws. If this principle of union supremacy is excluded, it is not difficult to imagine its deleterious results.
With regard to the distribution of Income Tax, the Commission made the following recommendations: . Despite the receding contribution by the Income Tax to the devolution of revenue to the States, the Commission recommended an increase in the per cent of the net proceeds to the States from 55 to 60, and the share of the Union Territories should be 1 per cent.
Financial relations between the Centre and the State were placed on the same footing as the other States. The State's custom duties were abolished. [51] Decisions affecting the disposition of the State could be made by the Central government, but only with the consent of the State government. [51] [53]
A state of financial emergency remains in force indefinitely until revoked by the President. The President can reduce the salaries of all government officials, including judges of the supreme court and high courts, in cases of a financial emergency. All money bills passed by the state legislatures are submitted to the President for approval.
VFA acknowledges the inherent challenges in achieving a perfect balance or symmetry in fiscal relations between different levels of government. This concept recognizes that a certain degree of asymmetry is an unavoidable and realistic aspect of fiscal federalism.