What is Fiscal Federation ? | Principles of Federal Finance

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Federation may be defined as a form of political association in which two or more states constitute a political unity with a common government. India is a federal state where there different types of state government and one union government. So friends, in today’s article we are going to know about the Principles of Federal Finance. So let’s discuss in details.

What is Fiscal Federation?

The Fiscal Federation means the fiscal setup of the government which studies the division of the financial power among the different state government and the union government as assigned by the constitution of the country.

Principles of Federal Finance

The Principles of Federal Finance or the financial principles of the division of financial resources are given below-

• Principle of Efficiency – Whether a particular tax should belong to central or to the regional govt should be decided on the basis of the administrative efficiency. There are some tax which can not be properly managed by the regional govt. but can be efficiently managed by the central government.

As for example – The income tax, therefore when financial duties are distributed administrative efficiency should be taken into consideration.

• Principle of Suitability – The second principles of federal finance is suitability, a tax may have wide or narrower jurisdiction. Taxes with narrow jurisdiction is suitable for state government or local government. On the other hand taxes on wider jurisdiction is suitable for the central government.

• Principle of Adequacy – The third criterion is adequacy. It means that the revenue assigned to the particular layer of government should be sufficient to carry out the functions assigned to it.

• Principle of Uniformity – The central government should perform its responsibility in such a manner that all states in a federal manner get uniform treatment. The term uniformity means that the system of taxation and patterns of expenditure should be same irrespective of the state.

• Principle of Economy – Another principles of federal finance or allocation of resources between central and state is the principle of economy. It means that tax collecting system should be based on economy. On the other hand, expenditure programme should also be based on the principle of economy.

• Principle of Autonomy – Under the federal setup, the government should be free to operate in the internal financial matters and it should have its own adequate resources of revenue and scope of expenditure. The state government should not took towards central government for financial help.

• Principle of Self Sufficiency – In a federal setup, the provision regarding the allocation of financial resources between union govt and state govt should be based on the principle of self efficiency. It means there should be adequate resource available with both the central and state government to performs their functions efficiently.

• Principle of Flexibility – Another important principles of federal finance is flexibility. The principle of the federal system should be flexible enough to meet the first changing requirement of the economy.

• Principle of Transfer Resources – Another principle of allocation of resources between central and state government is that there be a provision to transfer the resources from one state to another state.

• Principle of Integration and Co-ordination – This principle is essential in the distribution of resources among different layers of government as it leads to promote economic development in a federal system. The co-ordination is not required in the matter of taxation only but also in every scheme of the financial activities.


So friends, this was the concept of Principles of Federal Finance. Hope you get the full details about it and hope you like this article.

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