Vertical fiscal imbalance
Topic: Federalism and Centre-State Relations · NCERT: Class 11, Ch 7 "Federalism"
Meaning
Vertical fiscal imbalance is a gap between the Union and the states in a federation. The Union holds the best sources of revenue, but the states have heavy spending duties such as police, health and farming. So states cannot pay for all their work from their own taxes. They depend on their share of Union taxes and on grants from the Centre. The Class 11 Federalism chapter says states have "very meagre revenue sources".
Example
A state has to run hospitals, schools and the police, but its own taxes cover only part of the cost. It waits for Finance Commission tax shares and Union grants to balance its budget.
Don't confuse with
- Horizontal fiscal imbalance: a gap between states, where some are richer than others. Vertical imbalance is the gap between the Union and the states.
Related concepts
- Grants-in-aid
- Discretionary grants
- Gadgil formula
- 101st Constitutional Amendment Act 2016
- Concurrent taxing power for GST