Fiscal Federalism in India

Abstract

Countries are categorised as federal or unitary based on their level of autonomy in governance. Federalism is a political system in which constituent entities have autonomy to the point that sovereignty is shared by the union and the ‘units’ (commonly referred to as states). So, a state contains states. The term ‘federation’ etymologically refers to a union or league formed by agreement. However, fiscal federalism is not limited to federal nations. It is mainly concerned with the allocation of tasks and resources between two (or more) levels of government (or administrative divisions), regardless of whether the state is nominally federal or not. Inter-governmental resource transfer occurs due to differences in fiscal capability and requirements across governments at various levels. Fiscal federalism principles apply in most countries, including those that are not formally federal. Richard Musgrave, an American economist born in Germany, coined the phrase ‘fiscal federalism" in 1959. In 1999, Wallace E. Oakes described fiscal federalism as “understanding which functions and instruments are best centralised and which are best placed in the sphere of decentralised levels of government. This notion is applicable to all types of government: unitary, federal, and confederal.” A 9-judges panel of the Supreme Court of India has recently promulgated its ruling – pertaining to the case of Mineral Area Development Authority – elucidating the legal framework concerning the prerogatives of the states to levy taxes on minerals and land and buildings, both of which represent distinct taxation authorities of the states. The panel was tasked with evaluating the validity of a 1989 ruling rendered by a 7-judges panel, which had been subsequently revisited in 2004 by a 5-judges panel and subsequently cast in doubt in 2011, necessitating its referral for consideration. Consequently, this 9-judges panel ruling addresses a protracted controversy persisted for decades. The ramifications of this ruling, however, extend significantly beyond the immediate context. It clarifies the prerogatives and constraints of the states regarding their taxing authority over land in general and mineral rights specifically, thereby lifting the limitations imposed by the 1989 ruling and those preceding it chronologically. A range of other constitutionally pertinent propositions emerge from the ruling, which underscore its significance. This research discusses the ‘fiscal federalism’ in the light of the landmark judgement delivered in July 2024, regarding the states’ power to tax the minerals.