Vertical and horizontal imbalances are common features of most federations and India is

no exception to this. The Constitution assigned taxes with a nation-wide base to the
Union to make the country one common economic space unhindered by internal barriers
to the extent possible. tates being closer to people and more sensiti!e to the local needs
ha!e been assigned functional responsibilities in!ol!ing expenditure disproportionate to
their assigned sources of re!enue resulting in !ertical imbalances. "orizontal imbalances
across tates are on account of factors# which include historical backgrounds# differential
endowment of resources# and capacity to raise resources. Unlike in most other
federations# differences in the de!elopmental le!els in Indian tates are !ery sharp. In an
explicit recognition of !ertical and horizontal imbalances# the Indian Constitution
embodies the following enabling and mandatory pro!isions to address them through the
transfer of resources from the Centre to the tates.
$. %e!y of duties by the Centre but collected and retained by the tates &'rticle ()*+
(. Taxes and duties le!ied and collected by the Centre but assigned in whole to the tates
&'rticle (),+.
-. haring of the proceeds of all Union taxes between the Centre and the tates under
'rticle (./. &0ffecti!e from 'pril $# $,,)# following the eightieth amendment to the
Constitution replacing the earlier pro!isions relating to mandatory sharing of income tax
under 'rticle (./ and permissi!e sharing of
Union excise duties under 'rticle (.(+.
1. tatutory grants-in-aid of the re!enues of tates &'rticle (.2+
2. 3rants for any public purpose &'rticle (*(+.
). %oans for any public purpose &'rticle (,-+.
(. In addition to pro!isions enabling transfer of resources from the Centre to the tates# a
distinguishing feature of the Indian Constitution is that it pro!ides for an institutional
mechanism to facilitate such transfers. The institution assigned with such a task under
'rticle (*/ of the Constitution is the 4inance Commission# which is to be appointed at
the expiration of e!ery fi!e years or earlier. Under the Constitution# the main
responsibilities of a 4inance Commission are the following.
$. The distribution between the Union and the tates of the net proceeds of taxes which
are to be di!ided between them and the allocation between the
tates of the respecti!e shares of such proceeds.
(. 5etermination of principles and 6uantum of grants-in-aid to tates which are in need
of such assistance.
-. 7easures needed to augment the Consolidated 4und of a tate to supplement the
resources of the 8anchayats and 7unicipalities in the tate on the basis of
the recommendations made by the 4inance Commission of the tate.
-. The last function was added following the .-rd and .1th amendments to the
Constitution in $,,( conferring statutory status to the 8anchayats and 7unicipalities.
These Constitutionally mandated functions are the same for all the 4inance Commissions
and mentioned as such in the terms of reference &To9+ of different 4inance Commissions.
To enable the 4inance Commission to discharge its responsibilities in an effecti!e
manner# the Constitution !ests the 4inance Commission with power to determine its
procedures. Under the Constitution# the 8resident shall cause e!ery recommendation
made by the 4inance Commission together with an explanatory memorandum as to the
action taken thereon to be laid before each "ouse of 8arliament. o far# twel!e 4inance
Commissions ha!e gi!en their reports. The Thirteenth 4inance Commission is expected
to gi!e its report in :ctober# (//,. The Union go!ernment has always been accepting the
recommendations of the 4inance Commissions# exception being the recommendations of
the Third Commission relating to 8lan grants. There ha!e been ma;or changes in the
public finances of the Union and the tates during the period of o!er 22 years co!ered by
the 4inance Commissions. ' number of new matters ha!e been refereed to the
Commissions in consonance with these de!elopments. "ow the different 4inance
Commissions ha!e discharged their responsibilities in the e!er changing fiscal situation is
co!ered in the following sections under different heads.
VERTICAL DISTRIBUTION
1. Initially# the Constitution pro!ided for the sharing of only two Central taxes with
tates. 'rticle (./ permitted mandatory sharing of the net proceeds of income tax le!ied
and collected by the Union with the tates. uch proceeds assigned to tates did not form
part of the Consolidated 4und of India. 'rticle (.( pro!ided for sharing of Union excise
duties# if 8arliament by law so pro!ided. The shares of the tates in Union excise duties
were to be paid from the Consolidated 4und of India. This position continued till the */th
amendment of the Constitution in (/// which pro!ided for sharing of the proceeds of all
Union taxes and duties with the tates# except the Central sales tax# consignment taxes#
surcharges on Central taxes and earmarked cesses. This was done taking into account the
recommendation of the Tenth 4inance Commission to enable the tates to deri!e the
ad!antage of sharing the buoyancy of all Central taxes# to ensure greater certainty in the
resource flows to the tates and to facilitate increased flexibility in tax reforms.
2. 's per the then Constitutional pro!isions# tax sharing recommended by the first ten
4inance Commissions was restricted to the proceeds of income tax and Union excise
duties. The share of tates in the proceeds of income tax as recommended by the 4inance
Commission witnessed a significant ;ump from 22 per cent &the 4irst Commission+ to *2
per cent &the <inth Commission+. 4or the first time# the Tenth Commission lowered the
shares of tates to ...2 per cent on the ground that the authority that le!ied and
administered the tax should ha!e a significant and tangible interest in its yield. The higher
share of tates in income tax recommended by the Commissions was partly due to
historical reasons and partly on account of the Constitution pro!iding for compulsory
sharing of income tax proceeds with tates.
). 's far as the distribution of the proceeds of Union excise duties was concerned#
initially the share of tates was restricted to certain specified commodities. 4rom the
4ourth Commission onwards# tates were being gi!en a share in the proceeds of the tax
on all the commodities. The shares of tates in the Union excise duties as recommended
by the 4irst# econd and Third 4inance Commissions were 1/ per cent of the proceeds of
the tax on three commodities# (2 per cent of the proceeds of the tax on eight commodities
and (/ per cent of the proceeds of the tax on -2 commodities# respecti!ely. 5uring the
periods co!ered by the 4ourth to ixth Commissions# the shares of tates remained static
at (/ per cent of the net proceeds of the tax on all commodities. The e!enth
Commission made a ma;or departure by recommending an increase in the share of the
tates from (/ per cent to 1/ per cent. That Commission felt that the Union excise duties
should ha!e a predominant role in the transfer of financial resources to tates#
considering the size of the proceeds. 'nother factor that prompted the Commission to
increase the share of the tates was to effect bulk of the transfers through tax de!olution#
reducing the grants to a residual on the one hand and to lea!ing surpluses on re!enue
accounts with as large a number of tates as possible on the other hand.
.. The system of recommending shares of tates in the proceeds of income tax and Union
excise duties ga!e way to recommending shares of tates in the total net proceeds of all
taxes# heralding a new phase in tax de!olution to tates. This was facilitated by the
eightieth amendment of the Constitution in (///# which was done on the
recommendation of the Tenth 4inance Commission. The 0le!enth 4inance Commission
was the first Commission to make recommendations on tax shares under the new
dispensation. The 0le!enth 4inance Commission recommended that the tates= share in
Central taxes be fixed at (, per cent. :f this# ( percent share was on account of additional
excise duties le!ied by the Centre on man made textiles# tobacco and sugar in lieu of
sales tax by tates under a tax rental agreement between the Centre and the tates. The
Twelfth Commission increased the shares of the tates to -/.2 per cent.
*. The 0le!enth 4inance Commission# for the first time# introduced the concept of o!erall
ceiling on total Central transfers to tates from all channels on the re!enue account. The
indicati!e ceiling recommended by the Commission was -..2 per cent of the gross
re!enue receipts of the Centre. This was raised to -* per cent by the Twelfth 4inance
Commission. This indicati!e ceiling was based on the then pre!ailing le!el of transfers
on the re!enue account. The recommendation of the indicati!e ceiling seems to ha!e been
prompted by considerations relating to macro-economic and fiscal stability. This has
prompted tates to demand that the total re!enue account transfers might be fixed at 2/
per cent of the gross re!enue receipts of the Centre on the ground that this was the le!el
reached in the year $,,,-(///.
,. >roadly# the needs of the tates guided the recommendations of the first three
Commissions on !ertical distribution of resources. The 4ourth Commission# for the first
time# took the !iew that in determining the o!erall share of tates# due regard was to be
gi!en to the re6uirements of tates on the one hand and the needs of the Union on the
other. This was partly because of the reason that no reference was made to the resources
of the Centre and the demands thereon in the To9 of the first four Commissions.
'ppreciation of the need for applying more or less uniform norms for assessing the
resources and re6uirements of the Centre and the tates and their adoption started taking
shape from the ixth Commission onwards.
$/. The shares of tates in tax de!olution had gone up from about $/ per cent of the total
tax receipts of the Centre in the $,2/s to -/.2 per cent during the period of (//2-$/
co!ered by the recommendations of the Twelfth 4inance Commission. This was mainly
facilitated by the higher buoyancy of Central taxes as compared with the tate taxes#
reforms and broadbasing of Central taxes and the le!y of taxes on ser!ices by the Centre
from the year $,,1. The tax de!olution recommended by the successi!e 4inance
Commissions was without much contro!ersy. The tates# howe!er# ha!e been demanding
the fixation of their share in Central taxes at a higher le!el.
$$. The current arrangement regarding tax de!olution may undergo changes with the
proposal to introduce the unified 3oods and er!ices tax &3T+ from 'pril# (/$/. The
Thirteenth 4inance Commission has been asked to analyse the impact of the proposed
introduction of 3T from (/$/.
HORIZONTAL DISTRIBUTION
$(. 'fter making recommendations regarding tax de!olution# it is the task of the 4inance
Commissions to recommend its interse distribution amongst tates. Three phases are
discernible in the interse distribution of tax shares among tates. In the first phase which
lasted till the e!enth 4inance Commission# separate formulae were recommended for the
distribution of interse shares of tates in income tax and Union excise duties. eparate
Constitutional pro!isions go!erning the sharing of income tax and Union excise duties
with tates seem to ha!e prompted the first se!en 4inance Commissions to follow this
approach. 9ecommendation of a uniform formula for the inter se distribution of income
tax &excluding the percentage of tax proceeds earmarked for distribution on the basis of
origin+ and Union excise duties by the 0ighth 4inance Commission marked the beginning
of the second phase which lasted till the Tenth 4inance Commission. The 0le!enth
4inance Commission marked the beginning of the third phase with full con!ergence in
the distribution formula when all the Union taxes became shareable with tates.
$-. In the interse distribution of income tax# the first se!en Commissions assigned an
o!erwhelming weightage to population ranging from */ to ,/ per cent and the residual
weightage ranging from $/ to (/ per cent was assigned to contribution. It was for the first
time that considerations relating to e6uity gained prominence in the formula for interse
distribution of income tax proceeds in the recommendation of the 0ighth Commission.
This Commission assigned a weight of ((.2 per cent to the in!erse of per capita income
of tates and 12 per cent weightage to the distance of the per capita income of a tate
from the highest per capita income while reducing the weightage to population from ,/
per cent to ((.2 per cent and retaining the weightage to contribution at $/ per cent. The
0ighth Commission# again for the first time# adopted a common formula for the
distribution of ,/ per cent share of tates in income tax proceeds and the tates= share of
Union excise duties. The shift in the different components in the formula for interse
distribution in fa!our of e6uity was carried forward by the subse6uent Commissions. The
Tenth 4inance Commission had done away with the weightage gi!en to the contribution
in the interse distribution of tates= share of income tax on the ground that the tates=
efforts in collecting their own taxes was more rele!ant rather than its contribution to the
collection of Central taxes.
$1. The introduction of elements of e6uity in the formula for the interse distribution of
Union excise duties took place much earlier. The econd 4inance Commission while
gi!ing ,/ per cent weightage to population assigned the remaining weightage of $/ per
cent to certain ad;ustments. This marked the introduction of a factor which was intended
to correct the large weightage gi!en to population. 'll the subse6uent Commissions
assigned small weightages to factors like index of backwardness# distance of per capita
income# income ad;usted total population# etc. The e!enth 4inance Commission reduced
drastically the weightage assigned to population to (2 per cent and increased the
weightages assigned to e6uity. The principle of the same formula go!erning the interse
distribution of income tax and Union excise duties introduced by the 0ighth Commission
was followed by the <inth and Tenth Commissions. The Tenth 4inance Commission for
the first time assigned weights to efficiency parameters in the distribution formula. That
Commission assigned a weight of $/ per cent to fiscal self reliance as measured by the
share of own re!enues in total re!enue expenditure of a tate. The Tenth Commission
also inducted disability factors represented by area and infrastructure distance into the
distribution formula for the first time. The Commission assigned a weight of 2 per cent
each to these factors. ince then# the successi!e Commissions ha!e been assigning
weights to area. The Twelfth Commission did not assign any weight to infrastructure
distance. The introduction of elements of e6uity in the distribution formula was by and
large welcomed.
$2. The 0le!enth 4inance Commissions carried forward the shift in fa!our of e6uity
considerations in the formula for the interse distribution of tates= share in all Union
taxes. The recommendation of the Commission to reduce the weightage gi!en to
population to $/ per cent and to assign a weightage of )(.2 per cent to per capita income
distance had resulted in the reduction of shares of high income and middle-income tates
in tax de!olution. This e!oked a sharp reaction from these tates# despite the fact that the
Commission assigned a combined weightage of $(.2 per cent to tax effort and fiscal
discipline. The contention of these tates was that the better performing tates were
being penalized under the dispensation of the 4inance Commissions and that this was
creating a moral hazard for tates to remain profligate and not to impro!e their fiscal
situation. Though a need was felt to reward the tates for better performance# it gathered
momentum in the wake of the recommendation of the 0le!enth 4inance Commission
according higher weightage to e6uity. The Twelfth 4inance Commission increased the
weight to population from $/ to (2 per cent and reduced the weight assigned to distance
of per capita income from )(.2 per cent to 2/ per cent. 4urthermore# the Commission
doubled the weightage assigned to efficiency parameters like tax effort and fiscal self
sufficiency.
$). The criteria used by the 4inance Commissions for the interse distribution of tax shares
across tates can be broadly grouped under# a+ factors reflecting needs# such as
population and income measured either as distance from the highest income or as in!erse#
b+ cost disability indicators# such as area and infrastructure distance and c+ fiscal
efficiency indicators# such as tax effort and fiscal discipline. ?hile the weightage
assigned to population has declined considerably# weightage assigned to income distance
and efficiency factors has increased considerably in recent years.
$.. ' ma;or change in tax de!olution took place when the 0ighth 4inance Commission
recommended earmarking 2 per cent of the net proceeds of Union excise duties to those
tates which had a deficit in their non-plan re!enue accounts after taking into account
their shares in de!olution of all taxes including their share in the 1/ per cent of Union
excise duties earmarked for all tates. This earmarking of a specified portion of tates=
share in Union excise duties was continued by the <inth and Tenth 4inance
Commissions. Thus the problem of non-plan deficit on the re!enue account of tates
which had hitherto been addressed by 'rticle (.2 grants had come to be partly addressed
by tax de!olutions. This also had the effect of moderating the post-de!olution re!enue
account surpluses of certain tates.
$*. It has been argued in some 6uarters that there has been an accentuation of ine6ualities
across tates and that the 4inance Commission transfers failed to arrest this trend. >ut
one cannot look at the 4inance Commission transfers in isolation. ?hile transfers
designed by the 4inance Commissions in recent years ha!e laid considerable emphasis on
e6uity# transfers effected through other channels may not necessarily be guided by e6uity
considerations. >esides# pri!ate in!estment plays a ma;or role in explaining growth
differentials across tates. >y and large# 4inance Commission transfers remained more
progressi!e relati!e to other transfers. The initial imbalances were too large to be
addressed by the 4inance Commission transfers alone. Compared with tax de!olution#
grants ha!e a greater redistributi!e role. 3rants ha!e ranged between . per cent and (.
per cent of the total transfers recommended by the 4inance Commissions. urprisingly#
e!en backward tates ha!e expressed a preference for tax de!olution as a ma;or channel
of transfer because of its buoyancy as compared with grants which are fixed.
GRANTS-IN-AID
$,. "orizontal imbalances are addressed by the 4inance Commission through the system
of tax de!olution and grants-in-aid# the former instrument used more predominantly.
Under 'rticle (.2 of the Constitution# 4inance Commissions are mandated to recommend
the principles as well as the 6uantum of grants to those tates which are in need of
assistance and that different sums may be fixed for different tates. Thus one of the pre-
re6uisites for grants is the assessment of the needs of the tates. The 4irst Commission
had laid down fi!e broad principles for determining the eligibility of a tate for grants.
The first was that the >udget of a tate was the starting point for examination of a need.
The second was the efforts made by tates to realize the potential and the third was that
the grants should help in e6ualizing the standards of basic ser!ices across tates.
4ourthly# any special burden or obligations of national concern# though within the tate=s
sphere# should also be taken into account. 4ifthly# grants might be gi!en to further any
beneficent ser!ice of national interest to less ad!anced tates. >y and large# these
principles ha!e guided the grants recommended by all the 4inance Commissions.
(/. 3rants recommended by the 4inance Commissions are predominantly in the nature of
general purpose grants meeting the difference between the assessed expenditure on the
non-plan re!enue account of each tate and the pro;ected re!enue including the share of a
tate in Central taxes. These are often referred to as @gap filling grants=. The issues
relating to non-plan deficit grants are discussed in detail in a separate section. Up to the
4ifth Commission# grants were recommended only for co!ering the non-plan re!enue
deficits of tates after tax de!olution with only a few exceptions. The 4irst Commission
recommended grants for the expansion of primary education The Third Commission
recommended grants to co!er .2 per cent of the re!enue component of tate 8lans. The
3o!ernment of India did not agree with this recommendation on the ground that since
Central assistance was specifically sanctioned for the Third 4i!e-Aear 8lan# there was no
need for grants for 8lan purpose.
($. The position began to change with the ixth 4inance Commission when that
Commission was asked to consider the re6uirements of tates which were backward in
standards of general administration with a !iew to bringing them to the le!els obtaining
in the more ad!anced tates. It took the !iew that a 4inance Commission was basically
concerned with expenditure on re!enue account and therefore recommended upgradation
grants for meeting the re!enue expenditure deficiencies of certain tates in areas like
general administration# administration of ;ustice# ;ails# police# primary education# medical
and public health and welfare of scheduled castes# scheduled tribes and other backward
classes. The e!enth Commission was asked to consider upgradation of standards in non-
de!elopmental sectors and ser!ices. The Commission restricted the scope of grants to
administration of taxes# treasury and accounts administration# ;udicial administration#
general administration# police and ;ails. %ike the e!enth# the 0ighth and the Tenth
Commissions were asked to consider non-de!elopmental sectors. "owe!er# both these
Commissions recommended grants for de!elopmental sectors like education and health.
's the To9 of the <inth Commission did not specifically refer to the re6uirements of
upgradation# that Commission did not recommend any grants in its report for the period
$,,/-,2. The Commissions also recommended a mechanism to monitor the utilization of
upgradation grants. The 0le!enth and Twelfth 4inance Commissions did not recommend
any upgradation grants.
((. 's indicated earlier# the ixth Commission considered grants for meeting re!enue
expenditure alone. The e!enth took the !iew that there was no restriction imposed by
'rticle (.2 in making grants for capital expenditure. The e!enth 4inance Commission
took into account the re6uirements on capital account while recommending grants under
upgradation and special problems. 0!en so# the scope of the 4inance Commission grants
remained grants-in-aid of the re!enues to enable tates to meet capital expenditure. These
grants were by no means capital resource de!olution.
(-. :!er the years# the scope of grants to tates was extended further to co!er special
problems. The 0ighth 4inance Commission felt that one of the ob;ecti!es of the grants-in-
aid was to support tates in their efforts to sol!e special problems facing them.
'ccordingly# it recommended grants for special problems in ten states. The <inth 4inance
Commission too recommended special problem grants for the year $,*,-,/ but did not
recommend any such grants for the period $,,/-,2 on the ground that such problems
were meant to be dealt with by the 8lan itself. The Tenth# 0le!enth and Twelfth 4inance
Commissions also recommended grants for sol!ing special problems.
(1. 4ollowing the se!enty third and se!enty fourth amendments to the Constitutions# the
4inance Commissions were charged with the additional responsibility of recommending
measures to augment the Consolidated 4und of a tate to supplement the resources of
local bodies. This has resulted in further expansion in the scope of 4inance Commission
grants. The Tenth Commission was the first Commission to ha!e recommended grants for
rural and urban local bodies# though its To9 were not amended conse6uent to the
Constitutional amendment. 'll the subse6uent Commissions had recommended grants to
rural and urban local bodies. 3rants to local bodies constituted $..2 per cent of the total
grants recommended by the Twelfth 4inance Commission.

(2. The Twelfth 4inance Commission further extended the scope of grants to achie!e
e6ualization of expenditure across different states. ?hile full e6ualisation of expenditure
would re6uire a steep step up in the grants# the Commission restricted itself to partial
e6ualization of ser!ices in two sectors# namely education and health. The Commission
recommended grants under education to eight tates and those under health to se!en
tates# where the le!els of re!enue expenditure were lower relati!e to the a!erage
expenditure. The Commission adopted a new approach by recommending grants for the
maintenance of roads and bridges and public buildings. These grants are in addition to the
normal expenditure that the tates would be incurring on the maintenance of these assets.
(). Thus# o!er the years# there has been considerable extension in the scope of grants-in-
aid. <ow the 4inance Commission grants co!er in addition to meeting the non-plan
re!enue deficits# re6uirements of tates on account of special problems# and partial
e6ualisation of certain basic ser!ices. They e!en co!er the capital expenditure needs of
tates in these sectors. 's a result# the share of the gap grants in total grants had come
down to about 1/ per cent during the period co!ered by the Twelfth 4inance Commission.
TERMS OF REFERENCE
(.. 's indicated earlier# the three constitutionally mandated responsibilities of a 4inance
Commission are the distribution between the Union and the tates of the net proceeds of
shareable Central taxes# determining the grants to tates which are in need of assistance
and recommending measures to augment the Consolidated 4und of a tate to supplement
the resources of local bodies. These are mentioned as such in the 8residential :rder
constituting a 4inance Commission. In addition to the substanti!e functions# any other
matter can be referred to a 4inance Commission in the interest of sound finance under
'rticle (*/ &-+ &d+ of the Constitution. It has become customary to mention certain
considerations in the 8residential :rder appointing a Commission# which the
Commission may consider# among others# while making its recommendations. The
8residential :rder listing out the main functions# additional matters and considerations
constitutes the To9 of a 4inance Commission. In fact# the 4irst 4inance Commission was
not gi!en any To9. It proceeded with its work based on the substanti!e duties enumerated
in the Constitution.
Considerations:
(*. It has become customary for the 8residential :rder to mention certain considerations
that a Commission shall ha!e regard# among others# while making its recommendations.
These considerations by and large reflected the emerging de!elopments in Centre-tate
finances. Up to the ixth Commission# these considerations mostly related to 'rticle (.2
grants. The position changed with the e!enth Commission. In the case of the e!enth
Commission# the considerations were listed out in a separate paragraph and these
considerations related to both tax sharing and grants-in-aid. ince then# the practice is
continuing. The e!enth 4inance Commission was the first Commission to ha!e been
asked to take into account the resources of the Central go!ernment and the demands
thereon on account of the expenditure on ci!il administration# defence and border
security# debt ser!icing and other committed expenditure or liabilities. 0arlier the
considerations referred to only the resources of tates and the demands thereon. tates= in
their memoranda to the e!enth 4inance Commission had contended that the
considerations should not bind the Commission while making its recommendations on
tax de!olution. The Commission obser!ed that# @The change in our terms of reference
compared to those of the earlier Commissions is# in a sense# a purely formal one#
recognizing the past practice. 4urther# tax shares and grants-in-aid under 'rticle (.2 ha!e
always been inextricably linked to the scheme of transfer of the past Commissions=. The
Commission categorically stated in its report that the considerations specified in the
8residential :rder did not constrain its functioning in any way.
(,. The considerations specified for the <inth 4inance Commission stated that it shall
adopt a normati!e approach in assessing the receipts and expenditure on the re!enue
account of the tates and the Centre. This was in contrast to the terms of reference of the
pre!ious Commissions which were asked to take into account certain considerations#
among others. The tates# reacting to this change# contended that the 4inance
Commission deri!ed its authority from the Constitution and that its powers could not be
curtailed by a 8residential :rder. There was a similar debate when there was specific
reference to the needs of the Centre but no reference to the needs of the tates for the first
time in the case of the Twelfth Commission. The Twelfth Commission took the !iew that
the omission of any specific reference to the needs of tates might be due to the insertion
of a separate consideration in the To9 regarding the realization of the ob;ecti!e of not
only balancing the receipts and expenditure on re!enue account of all tates and the
Union# but also generating surpluses for capital in!estment. 5espite there being no
specific consideration# it had assessed the needs of the tates as comprehensi!ely as in
the case of the Centre.
-/. The tates felt that the considerations were biased in fa!our of the Centre. Their
grie!ance was based on the point that the considerations specified for the 4inance
Commissions mentioned only guidelines for the assessment of resources and needs of
tates. In the case of the Centre# mention was made of its resources but in the case of the
tates mention was made of the efforts made to raise additional resources. The
Commissions ha!e by and large allayed these apprehensions by taking the stand that the
considerations were no constraints on their working and by gradually adopting normati!e
approach in their assessment of the resources and needs of the Centre and the tates. If
the considerations were more specific about the tates# it could be because of the fact that
whereas in the case of the Centre the Commissions had to consider merely the capacity to
de!ol!e a certain share of its re!enue# they had to assess the needs of each tate In the
case of tates# any additionality accruing to a tate disproportionate to its need might
lead to grie!ance on the part of other tates.
Additiona !atters:
-$. The important additional matters referred to the 4inance Commissions are distribution
of proceeds of additional excise duties in lieu of sales tax# distribution of grants to tates
in lieu of the tax under the repealed 9ailway 8assenger 4ares 'ct# $,2.# modalities of
financing relief expenditure# upgrdation of standards of administration# special problems
and the assessment of the debt position of the tates. In the backdrop of all round
deterioration in the tate as well as Central finances# for the first time# the 0le!enth
4inance Commission was asked# by way of an additional item# to re!iew the state of the
finances of the Union and the tates and suggest ways and means by which the
go!ernments# collecti!ely and se!erally# might bring about a restructuring of the public
finances so as to restore budgetary balances and maintain macro-economic stability. In
accordance with this additional item# the 0le!enth 4inance Commission recommended a
restructuring plan aimed at bringing the re!enue deficit of the Centre and the tates to no
more than $ per cent of 358# containing the combined fiscal deficit to less than ).2 per
cent of 358 and achie!ing a tax-358 ratio of around $. per cent. The strategy suggested
to achie!e the restructuring consisted of wide ranging reforms in tax and non-tax
re!enues# containing expenditure on subsidies and ma;or restructuring of expenditure. '
similar additional matter was referred to the Twelfth 4inance Commission. The Twelfth
4inance Commission was asked to suggest a restructuring plan to achie!e debt reduction
along with e6uitable growth in addition to macro-economic stability. In addition# the
Commission was also asked to draw a monitorable fiscal reforms programme aimed at
reduction of re!enue deficit of tates.
-(. The Twelfth 4inance Commission recommended a multi-dimensional restructuring
aimed at both 6ualitati!e and 6uantitati!e aspects of managing go!ernment finances. The
core strategy centered on raising the trend rate of growth by reducing go!ernment
dissa!ings# which in turn re6uired elimination of re!enue deficit and reduction of fiscal
deficit. 4iscal consolidation suggested by the Commission included elimination of
re!enue deficit by the Centre and the tates by (//*-/,# reducing fiscal deficit to - per
cent of 358B 358 by the tates and the Centre and bringing down the combined debt-
358 ratio to .2 per cent by (//,-$/. The long term goal for the Centre and the tates as
suggested by the Commission was to bring down and maintain the debt-358 ratio at no
more than (* per cent each. To achie!e these le!els# the Commission recommended wide
ranging reforms on tax# non-tax and expenditure fronts. The Twelfth 4inance
Commission was also asked to examine the issue whether non-tax income of profit
petroleum to the Union# arising out of contractual pro!isions# should be shared with the
tates and if so# to what extent.
--. ?ith eminent persons on its body and in consultations with the tates and the Centre#
the 4inance Commissions ha!e succeeded in resol!ing a number of !exatious issues.
4inance Commissions in the past ha!e streamlined the financing of relief expenditure and
institutionalized the arrangements for calamity relief in the form of Calamity 9elief 4und
and <ational Calamity Contingency 4und. 3rowing and unsustainable debt position of
the tates and the Centre was a ma;or issue in Centre-tate fiscal relations. 8eriodic
rescheduling of Central loans to tates and debt relief linked to certain performance
indicators were tried out by the 4inance Commissions to extend relief to tates. The
Twelfth 4inance Commission=s recommendation for the termination of Centre=s
disintermediation in loans has eliminated the moral hazard of tates expecting periodic
bail outs. The Commission recommended a 5ebt Consolidation and 9elief 4acility aimed
at pro!iding debt write off and interest relief linked to re!enue deficit reduction and
reduction in interest burden. The Commission stipulated that the benefit under the
4acility was conditional on each tate enacting fiscal responsibility legislation. The
enactment of fiscal responsibility legislation by almost all the tates following the
recommendation of the Twelfth 4inance Commission resulted in rule-based management
of public finances replacing the discretionary management of public finances which
resulted in all round deterioration in public finances. This is a ma;or landmark in the
history of public finances in the country.
"an and Non-"an Con#ndr#!:
-1. ' ma;or debate regarding the recommendations of 4inance Commissions relates to
4inance Commissions restricting their assessment of tate finances to non-8lan re!enue
account. There is no distinction between the expenditure on the 8lan and non-8lan
account in the Constitution. The budgetary classification of expenditure into 8lan and
non-8lan came into !ogue with the introduction of centralized planning in India. There
were no specific To9 for the first Commission. The econd and the Third Commissions
were asked to take into account the re6uirements on account of the 8lan. The econd
Commission recommended grants under 'rticle(.2 to enable tates to meet their entire
re!enue expenditure on 8lan and non-8lan account along with 8lan grants and additional
resource mobilization. The Third Commission took into account .2 per cent of the
estimated re!enue component of the 8lan while recommending tax de!olution and grants-
in-aid. The go!ernment did not accept the 8lan grants recommended by the Commission
on the ground that Central assistance was specifically granted for the Third 4i!e-Aear
8lan and that there was no need for the Commission to again consider the 6uestion of
8lan grants. The 4ourth# 4ifth and the ixth Commissions were asked to take into account
the re6uirements of tates to meet the committed expenditure on the maintenance of 8lan
schemes completed. In addition to committed expenditure# the 4ifth and the ixth
Commissions were asked to consider the re6uirements on re!enue account of tates to
meet the expenditure on administration# interest charges# etc.# which were basically in the
nature of non-8lan expenditure. Though the To9 excluded specific reference to 8lan
re!enue account# it was contended that no bar was placed on these Commissions to
consider the entire re!enue account. The 4ourth Commissions decided not to deal with
the 8lan expenditure on the ground that the 8lanning Commission which had been
specifically constituted should ha!e unhampered authority in the domain of planning. The
4ifth and ixth Commissions did not recommend any grants for meeting 8lan re!enue
expenditure. The e!enth and 0ighth 4inance Commissions were asked to take into
account re6uirements of tates on re!enue account to meet non-8lan commitments. These
Commissions did not take into account 8lan expenditure by implication.
-2. The <inth Commission was asked to keep in !iew the ob;ecti!e of not only balancing
the receipts and expenditure on re!enue account of both the tates and the Centre# but
also generating surpluses for capital in!estment. The Commission took the stand that
unless the entire re!enue account was considered# it would not be possible to balance the
re!enue account. The Commission after obtaining a legal opinion took the stand that
grants for 8lan purposes were !ery much within the pur!iew of the 4inance Commissions
and recommended 8lan grants. In the case of the tates ha!ing non-8lan surplus# the
Commission assumed that 1/ per cent of this surplus would be a!ailable for the 8lan. If
there was a deficit on the re!enue account after this exercise# the Commission
recommended grants e6ui!alent to the assessed deficit on the 8lan re!enue account.
Ultimately# the 8lan grants recommended by the <inth Commission were considered as
the tates= own resources for the 8lan and the normal formula based Central assistance
for tate plans was dispensed in the usual manner. The practical difficulties in!ol!ed in
making pro;ections of 8lan outlays by and large kept the subse6uent 4inance
Commissions away from considering 8lan re!enue expenditure.
-). The Thirteenth 4inance Commission# for the first time# has been asked to take into
account the gross budgetary support to the Central and tate 8lans as a demand on the
resources of the Centre.
-.. The 4inance Commissions ha!e been facing certain practical problems as the periods
co!ered by a 4i!e-Aear 8lan and a 4inance Commission were not coterminous. The
econd 4inance Commission pointed out the difficulties arising from the periods not
being coterminous. tates ha!e a tendency to suppress their committed expenditure and
o!er estimate re!enue for the 8lan resources. ' few attempts had been in the past to make
the periods coterminous. The Third Commission was asked to gi!e its report co!ering the
period of four years $,)(-))# so that the 4ourth Commission and the 4ourth 8lan could
be coterminous &$,))-.$+. >ut the 4ourth plan could be finalized for the period $,),-.1
because of the war with China. The second attempt at synchronization was made by
curtailing the period co!ered by the 4ourth Commission by two years. The 4ifth
Commission=s recommendations co!ered the period $,),-.1 same as the 4ourth 8lan.
This synchronization continued till the 4ifth Commission. The third attempt at
synchronization was made at the time of the <inth Commission. The <inth Commission
was asked to gi!e two reports# the first report co!ering the year $,*,-,/ and the second
report co!ering the period $,,/-,2 to synchronize with the 0ighth 4i!e-year 8lan. >ut
the intended synchronization did not take place as the 0ighth 8lan commenced two years
later. 4ollowing the recommendations of the 'dministrati!e 9eforms Commission# a
con!ention was established to appoint a member of the 8lanning Commission to the
4inance Commission from the ixth Commission onwards to ensure better coordination
between these two institutions.
A Retros$e%t:
-*. There is a general consensus that the institution of the 4inance Commission has
ac6uitted itself well. There has been considerable expansion in the role of the
Commissions from mainly being an arbitrator between the Centre and the tates to being
an architect of fiscal restructuring. There has been near stability in the share of tates= in
the combined re!enue expenditure at about 2. per cent. Centralisation of economic
policy did not show up in any reduction in the share of tates. It may be true that tates=
expenditure has come to be more influenced by the Centre. There has been a decline in
the re!enue expenditure financed by own resources from */ per cent in the early fifties to
around )/ per cent now. This could be partly on account of the higher buoyancy of
Central taxes and increase in their co!erage. 4inance Commission transfers still account
for the bulk of the Central transfers.
-,. 5espite the changing fiscal en!ironment and considerable expansion in its functions#
the institution of the 4inance Commission has ensured smooth functioning of Centre-
tate fiscal relations. If there has been no breakdown in the Centre-tate relations# the
credit for this entirely goes to the 4inance Commissions. It also goes to the credit of the
framers of the Indian Constitution that the pro!isions relating to Central- tate fiscal
relations ha!e stood the test of time. They pro!ed ade6uate e!en in meeting the changing
en!ironment. 4iscal federalism will always remain a work in progress and the institution
of the 4inance Commission# as in the past# will continue to deal with the changing
en!ironment and emerging challenges. The recent impro!ement in the fiscal situation can
also be partly attributed to the focus that the recent 4inance Commissions laid on fiscal
restructuring. The global de!elopments unfolding since eptember (//*# ha!e cast
shadow on the fiscal correction path undertaken by the Centre and the tates. >ut these
may be temporary blips and it is hoped that the fiscal consolidation will be back on track.
The Thirteenth 4inance Commission has a ma;or task ahead in coping with the challenges
posed by the global meltdown and in ushering in a new era in fiscal federalism with the
proposed introduction of 3T from 'pril (/$/.
In general spoken and written 0nglish we do not usually pay attention to the difference
between two similar terms and use them interchangeably. Cidnapping and abduction are
such two terms which are are generally used as synonyms but in the eyes of law they
ha!e different meanings-
Di&&eren%e in a n#ts'e-
Kidnapping- 9emo!ing a minor away from lawful custody without the guardian=s
consent. The !ictim has to be a !inor. The offence of kidnapping is punishable under
Indian 8enal Code.
Abduction- 4orcefully compelling a person to go from any place deceitfully. The !ictim
could be a ma;or or a minor. In India# under the Indian 8enal Code# a(d#%tion is not
$#nis'a(e in itse&. It must be accompanied with some other listed offences.
(This article is meant only for general understanding and must not be assumed to be
precise legal difference between kidnapping and abduction. If you are looking for a
detailed difference then please refer to Orissa High Courts decision in the case of -
Abhaya Jena v.State of Orissa, (1997) ri!es "#1 (Ori)
'part from the !arious acts concerning children# The Indian 8enal Code &I8C+ also has a
list of offences against children. 'ccording to the sections *( and *- of the I8C a child
who commits a crime and is below the age of se!en is not considered to ha!e committed
a crime. ' child who is between the ages of se!en and twel!e and is deemed to ha!e
immature understanding about the conse6uences of hisBher actions is also considered
incapable of committing a crime.
ection -$2 and -$) discusses the offence of foeticide and infanticide. If a person
commits an act with the intention of pre!enting the child from being born ali!e or an act
that results in the death of the child after birth# that person is committing
foeticideBinfanticide as long as they do not do it in the interest of the motherDs health or
life. If a person does an act that amounts to culpable death which results in the 6uick
death of an unborn child# he will be charged with culpable homicide. ection -/2 states
that it is a crime for any person to abet the suicide of a child# i.e. a person who has not
completed eighteen years of age.
ection -$. states that is it a crime against children# if their mother or father expose or
lea!e a child in a place with the intention of abandonment. This does not pre!ent the law
from pursuing further if the abandonment results in the death of the child. The parents
would then be charged with culpable homicide or murder.
There are a number of sections in the I8C that discuss kidnapping and abduction. ection
-)/ states that kidnapping from India is the defined as the con!eyance of a person
beyond the borders of India without their consent. -)$ states that if a male minor of not
yet sixteen and female minor of not yet eighteen is taken from their lawful guardians
without their consent it is termed kidnapping from lawful guardianship. ection -)(
defines abduction as compelling# forcing or deceitfully inducing a person from a place.
ection -)--' states# it is a crime to kidnap or maim a minor for the purpose or
employment of begging. If a person if found employing a minor for begging# and that
person is not the legal guardian of the child# it is assumed that the child has been
kidnapped for the purpose of employment in begging. ection -)1 states that any person
who kidnaps another for the purpose for murdering or disposing of in a way that will lead
to murder is punishable by law. ection -)1-' defines ransom kidnapping as any person
who kidnaps another to threatens to harm or kill that person in an attempt to get the
go!ernment# or any other foreign or state organisation to do or not do any act. ection
-)2 discusses kidnapping to secretly or wrongfully confine someone. ection -)) states it
is a crime to force or compel or abuse a woman to lea!e a place in order to force her to
marry or seduce or illicit sexual intercourse from her by the kidnapper or another person.
-))' specially outlines such a crime being committed against a minor girl who has not
attained eighteen years of age. ection -). states it is a crime to kidnap a person in order
to cause them grie!ous hurt# place them in sla!ery# or sub;ect them to the unnatural lust of
a person. ection -), is a specific crime of kidnapping a child under $/ years of age in
order to steal from them.
exual offences against children are also co!ered in the I8C. ection -.( discusses the
selling of a child &below the age of eighteen+ for the purpose of prostitution or to illicit
intercourse with any person# or knowing that it is likely that the child is being sold for
such a purpose. ection -.( states it is a crime to buy a child for the purpose of
prostitution or to illicit sex from any person.
ection -.) discusses the offence of rape. Under this section a man who rapes his wife#
who is not below twel!e years old is gi!en a lesser punishment. The section also
discusses special circumstances of rape such as rape committed by a ci!il ser!ant or
police man# rape of a pregnant woman# gang rape or rape of a child below the age of
twel!e.
Do)noads *
I8C 'ct
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+, -'at is !eant (. /idna$$in0 &ro! India1
/idna$$in0 &ro! 0#ardians'i$1 and a(d#%tion2
Di&&erentiate (et)een 3idna$$in0 and A(d#%tion,
3idna$$in0
3idna$$in0 &ro! India - Cidnapping from India means taking anybody# without his
consent# out of the borders of India. ection -)/ defines it as follows -
Se%tion 456 - ?hoe!er con!eys any person beyond the limits of India without the
consent of that person or of some person legally authorized to consent on behalf of that
person# is said to kidnanap that person from India.
4or example# if ' takes > without his consent or without >Ds lawful guardians consent to
8akistan# ' would be committing this offence. The essential ingredient of Cidnapping are
-
$. The person should be con!eyed out of the borders of India.
(. The person should be con!eyed without his consent or without the consent of the
person who is legally authorized to consent on his behalf.
Thus# if a person is not capable of gi!ing !alid consent as in the case of a minor or a
person with unsound mind# the consent of his lawful guardian is re6uired to take him
outside India.
3idna$$in0 &ro! La)&# 0#ardians'i$ - Cidnapping from lawful guardianship means
taking a child away from his lawful guardian without the guardianDs consent. ection -)$
defines it as follows -
Se%tion 457 - ?hoe!er takes or entices any minor under $) yrs of age if male or $* yrs
of age if female# or any person of unsound mind# out of the keeping of the lawful
guardian of such minor or person of unsound mind# without the consent of such guardian#
is said to kidnap such minor or person from lawful guardianship.
E8$anation - The words lawful guardian in this section include any person lawfully
entrusted with the care or custody of such minor or other person.
E8%e$tion - This section does not extend to the act of any person who in good faith
belie!es himself to be the father of an illegitimate child or who in good faith belie!es
himself to be entitled to the lawful custody of such child# unless such act is committed for
an immoral or unlawful purpose.
>ased on this section the essential ingredients are -
$. T'e $erson s'o#d eit'er (e a !inor or a $erson o& #nso#nd !ind - This
implies that the person is not capable of gi!ing consent. In case of male child the
age is $) yrs while in case of a female child the age is $* yrs. 4or a person on
unsound mind# age is immaterial.
(. S#%' $erson (e ta/en or enti%ed a)a. - This means that either force is used or
any enticement that causes the person to lea!e domain of the lawful guardian is
used. 4or example# if ' shows toffee to a child C thereby causing the child to
come out of the house and follow '# it fall under this category.
-. S#%' $erson !#st (e ta/en or enti%ed a)a. &ro! t'e a)&# 0#ardian - :nly
when the child is under the lawful guardian# can he be kidnapped. This means that
the child should be under the domain of the lawful guardian. 4or example# an
orphan wandering on the streets cannot be kidnapped because he doesnDt ha!e a
lawful guardian. "owe!er# this does not mean that a child must be with the lawful
guardian. 4or example# a child siting in a school is also under the dominion of his
father and if ' takes such a child away# it would be kidnapping. 4urther# a lawful
guardianship does not necessarily mean a legal guardian. ' legal guardian may
entrust the custody of his child to someone else. Taking a child away from such
custody will also fall under this section. 4or example# ' entrusts his child to ># his
ser!ant# to take the child to school. If# C takes the child away from the ser!ant#
this would be kidnapping because the ser!ant has the lawful guardianship of the
child.
Distin%tion (et)een ta/en a)a. and ao)in0 a %'id to &oo) -
In Vardra9an :s State o& Madras AIR 7;5<1 SC obser!ed that there is a difference
between taking away a minor and allowing the minor to follow. If a person knowingly
does an act which he has reason to belie!e will cause the child to lea!e the guardian# then
it would amount to taking away the child# howe!er# if child follows a person e!en when a
person does not do any act meant to entice a child to lea!e his guardian# he cannot be
held responsible. 4or example# if a child follows an icecream !endor# without any
enticement from the !endor# while the guardian fails to keep the watch# the !endor cannot
be held guilty under this section.
In C'a99# Ra! :s State o& "#n9a( AIR 7;5=# a minor girl was taken away out of the
house for only about (/ - -/ yards. it was held that it was kidnapping because distance is
immaterial.
Cidnapping is complete as soon as the minor or the person with unsound mind lea!es the
custody of the guardian. It is not a continuing offence. Thus# when a child is kidnapped
from place 8$ and taken to place 8( and then from 8( to 8-# kidnapping was done only
once.
A(d#%tion
ection -)( of I8C defines 'bduction as follows -
Se%tion 45> - ?hoe!er by force compels# or by any deceitful means induces# any person
to go from any place is said to abduct that person.
It means compelling a person# or to induce him to go from where he is to another place.
The essential ingredients are -
A $erson 0oes &ro! one $a%e to anot'er - ' person cannot be abducted at the same
place where he is. 4or abduction to take place# the person should physically mo!e from
one place to another.
Eit'er (. &or%i(e %o!$#sion or (. ind#%e!ent - The mo!ement of the person must
be because of some compulsion or because of some inducement. 4or example# '
threatens > on gun point to go from his house to another city. "ere# ' has compelled > to
go from his house and is thus guilty under this section.
"ere# the age of the abducted person is immaterial. Thus# e!en a ma;or can be abducted if
he is forced to go from one location. >ut if a minor is abducted# it may amount to
Cidnapping as well. 4urther# it is a continuing offence. 's long as a person is forced to go
from place to place# abduction continues.
Di&&eren%es a!on0 3idna$$in0 &ro! India1 3idna$$in0 &ro! a)&# 0#ardian1 and
A(d#%tion -
3idna$$in0 &ro!
India ?Se%tion 456@
3idna$$in0 &ro! a)&#
0#ardian ?Se%tion 457@
A(d#%tion ?Se%tion 45>@
' person is taken out
of the limits of India.
' person is taken away from the
lawful guardian.
' person is compelled by force
or induced by deception to go
from any place.
'ge of the person is
immaterial.
The person must be less than $) yrs
of age if male# less than $* if
female# or of unsound mind.
'ge of the person is
immaterial.
It is not a continuing
offence.
It is not a continuing offence. It is a continuing offence.
The person is
con!eyed without his
consent.
Consent of the person kidnapped is
immaterial.
8erson mo!es without his
consent or the consent is
obtained by decietful means.
It can be done
without use of force.
It can be done without use of force
or deception.
It is always done by the use of
force or deception.