FISCAL DECENTRALIZATION
Decentralisation in general, is an ongoing and gradual process whereby, political, administrative and fiscal powers are transferred from the central government to the state and local governments.
Components of fiscal decentralization are:
1. Expenditure Sharing
The central government in a federal system, transfers the public expenditure responsibilities to the lower levels of government. Each state government has unique public expenditure obligations depending upon the needs of their people. In most cases, the state government is responsible for social sector expenditure on education and health, child and youth welfare, subsidised housing.
2. Tax Sharing
Some taxes are levied by the central government and part of the proceeds is transferred to the state governments.Tax-sharing is advantageous because, when tax is collected by one authority it brings in uniformity of tax rate, makes collection easier and lowers cost of collection. In India, the central government collects personal and corporate income tax and shares the proceeds with the state government. The mode of sharing tax differs from country to country. In some countries, the central government collects taxes and shares the entire proceeds with the state or regional governments after deducting the cost of collection.
3. Supplementary Levies
Supplementary levies are imposed over and above a main tax, Cess and surcharges are examples of such levies. These are imposed by the central government and proceeds are distributed to the lower level government.
4. Local Taxes
These local governments have the power to impose and collect taxes usually on property, sale of goods and services, movement of goods, and in some cases even on income. Such powers are a part of fiscal decentralization. Collection of these taxes provides greater autonomy to local governments to carry out expenditure to meet the needs of the local population.
5. User Charges
In many cases, local governments supplement their tax collection by charging user charges and fees from the people for use of local infrastructure. Examples of these are ro tolls, fees for using public spaces like parks, museums, art, galleries, etc.
6. Inter-Governmental Transfers of Grants
Grants-in-aid are provided by the central government to the state governmen to meet additional need for funds for services they have to provide. Grants are classified as (a) outright or untargeted grants given to bridge the gap between current revenue and expenditure of the state government and there are no conditions attached to these grants, and (b) targeted or conditional grants to meet specific expenditures, like provision of primary education or primary health care.
7. Loans
Loans are necessary to finance large capital expenditure. Large infrastructure related expenditure cannot be funded through revenue receipts. The central government provide loans to the state government to meet such expenditures either fully or partially. Such loans are expected to be used for productive purposes so that they are self-liquidating, that is, they generate income to repay the loans. The rates of interest on such loans are usually lower than the market rates.
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