The comprehensive framework of India’s fiscal policy has been provided in the constitution of India. The powers to levy taxes and spending responsibilities of India has been divided between the central and the state government due to its federal form of government. Since, it is not mandatory that the taxing capabilities of the states are adequate as per their spending responsibilities, it is due to this reason that some of the revenue of the central government needs to be assigned to the state government. The Indian constitution therefore, provides for the formation of a Finance Commission every five years so as to provide the basis for this assignment and give medium term guidance on financial matters. On the basis of the report of the Finance Commission, the central taxes are transferred to the state governments.
For every financial year, both the governments, i.e.centre and state has to place a statement of its future taxing and spending provisions before the legislature for legislative debate and approval which is known as budget as per the Indian constitution.
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