Public finance means the financial transactions of the government. Under the federal structure, the financial relationship between the union government and the state governments are based on the principle of federal Finance. The Indian constitution provides a three-fold distribution of legislative powers between the centre and the states. The Seventh schedule of the constitution consists of the Union List, the state list and the concurrent List. Union List includes the taxes which are levied, collected and retained by the central government, while the State List includes those taxes which are levied, collected and retained by the state governments.
Those taxes which are not specified in the first two lists are included in concurrent list. To-avoid any dispute between the centre and states in the field of tax revenue, some constitutional provisions have been made. The division of powers between the centre and states in respect of the imposition and collection of tax revenue and the appropriation of that revenue can be shown in the following:
1. Taxes levied, collected and appropriated by centre: (i) Customs duty, (ii) Corporation tax.
2. Taxes levied and collected by centre but appropriated by both centre and states: (i) Income tax, (ii) Union excise duty.
3. Taxes levied and collected by centre but appropriated by states: (i) Taxes on railway freight and fares, (ii) Estate and succession duty other than agricultural land.
4. Taxes levied by centre but collected and appropriated by states: (i) rates of stamp duties on financial documents, (ii) taxes other than stamp duties on transactions in stock exchanges.
5. Taxes levied, collected and appropriated by states: (i) sales tax, (ii) land revenue.
The Indian constitution provides for the appointment of a finance commission, by the president of India on five yearly bases to determine the basis of distribution of the tax proceeds between centre and states.
In the context of resource mobilization for economic development during planning period, public finance in India has assumed an altogether new significance with renewed objectives. The objectives of taxation were revenue regulation and economic control. The efficiency of public finance network can be accessed from the standpoints of equity, economic consequences and Simplicity.
However in view of the less-developed country like India, the functions of public finance, apart from its traditional functions should be to:
curtain national consumption,
reallocate resources to no more beneficial investments,
provide funds for Government business, and,
provide incentives to alter behavioral patterns in order to facilitate economic growth.
It is against their backgrounds we shall review the salient features of the public finance system in India.