Top 5 Tools for Inter-Governmental Resource Transfer

This article throws light upon the top five tools adopted for inter-governmental resource transfer. The tools are:

Inter-Governmental Resource Transfer: Tool # 1. Tax Sharing:

It is mode a in which a tax (or taxes) is levied by one agency and the proceeds distributed between different agencies. Generally the tax is collected by the central government and the proceeds are shared among the states. The collection and administration of tax by a single layer of government is justified on the basis of economy, uni­formity and reduced tax evasion.


In India, for example income tax, and excise duty are collected by the union government but the proceeds are distributed between the centre and the states. Another form of tax sharing is one in which the central government collects the tax, but distributes all the proceeds without retaining anything for its own use.

The sharing of tax proceeds are determined by the nature or form of tax to be shared, determination of the share of each state and the total divisible pool. The divisible pool is obtained by subtracting the cost of collection from the gross proceeds.

The share of taxes to the state government from the divisible pool de­pends upon the percentage share assigned to it which again is de­termined by factors like population, economic and social backward­ness and contribution by each unit to the divisible pool.

Inter-Governmental Resource Transfer: Tool 2. Loans:

In federal finance loans play a special role in regional development. State government usually borrows extensively from central govern­ment to tide over financial difficulties.

At other times the state gov­ernment undertakes a number of development projects, the financing of which cannot be met from revenue resources alone. In such a situation central government provides loans to finance such projects of state governments.

In the case of loan financed projects, the state government be­comes more careful and tries to retain economy in spending, since capital and interest have to be returned back. Further some times, loans may be utilized by the state governments to overcome natural calamities and to meet short falls in revenue collection.

Inter-Governmental Resource Transfer: Tool 3. Supplementary Levies:


In this method the principle tax is levied by the central government and supplementary tax is levied by the state government or vice versa. Usually principle tax is levied by the central government and the supplementary tax levied by the state government. However ut­most care should be taken to ensure the supplementary levy may not be very large or may not be more than the principle tax.

Inter-Governmental Resource Transfer: Tool 4. Grants-in-Aid:

Another method of transferring revenue to the lower level of govern­ment in a federation is the system of grants. This fiscal tool of re­source transfer is widely used in all most all federations.

Prof. Herman Finer defines grants-in-aid as “a sum of money assigned by a superior to an inferior governmental authority either out of the exche­quer of the former or out of source of revenue specially designated”.

In this definition the word superior and inferior is interpreted not in terms of political states, but in terms of command of resources.


Grant in aid is provided:

(a) To meet additional resource needs of state governments,

(b) For providing certain services without increasing the tax burden on the people,

(c) For reducing regional imbalances, and


(d) For bringing the possible uniformity and balance between functions and resources among the various states.

Grants may be general (block grant or unconditional grant) or selective grant (restrictive grants or conditional grant), Grants may also be matching or nonmatching, Grants given to the states, pro­vide the centre a certain measures of influence on the policies and schemes adopted by the states.

(i) Conditional Grants:

These types of grants are provided for fulfilling certain specific expenditure programmes, for which it is allo­cated. In this case the authority transferring resources may retain the responsibility for its proper use.

A conditional grant involves spe­cific applications of restrictions by the disbursing government re­garding the use of funds by the recipient government; usually con­ditional grants are apportioned for certain specific projects under­taken by the states.

For example Central grant for the provision of higher education requirements of schedule caste and schedule Tribe population in a particular state is a conditional grant. This type of grant is also called selective or categorical grants.

Conditional grants are provided under matching or non-matching formula. In the case of the matching conditional grants, the aid receiving government must spend, from its own fund, some proportion of the fund received from the aid disbursing country. In non-matching conditional grant the aid fund is provided without matching requirements on the part of the recipient of the fund.

(ii) Unconditional Grants:

An unconditional grant is usually spent by the states without any central control or supervision in any manner. Only general conditions may be governing the provisions of such grants. In such grants no conditionality is attached to the use of the funds.

Unconditional grants are usually given to bridge the gap between revenue and expenditure of the resources deficient states. This is also called equalizing grants or block grants.

Conditional and unconditional grants possess merits and demer­its. Conditional grants are considered to be based on the doctrine of financial responsibility.

Whereas unconditional grants is based on the principle of state autonomy. The state can utilize such grants to meet its growing and diverse expenditure requirements. However in a federal Set up there should be a combination of both system of aid disbursement.

Inter-Governmental Resource Transfer: Tool 5. Inter-Government Financial Institutions:

In modern times most of the federations have established inter-governmental financial institutions for consultation between two layers of government and to evolve a regular process of financial adjust­ment between them.

These institutions deal with problems con­cerning tax sharing, determination of grants. Coordination’s and settlement of financial dispute between centre and state governments etc. For example in India there is a constitutional provision for the appointment of Finance Commission once in five years. Finance commission is a statutory body and it recommends changes in the inter-governmental financial transfers.

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