The Constitution of India has provided provisions which enable the Union and the States to work in coordination and to levy and collect taxes through systematic arrangements. However the fiscal relations have undergone significant changes in recent years. Three landmark changes subsequent creation of the NITI Aayog; higher tax devolution to the states based on the recommendations of the Fourteenth Finance Commission (14 th  FC); and Goods and Services Tax (GST).

Following are the concerns regarding increasing encroachment by the Centre in fiscal Space-
1. Vertical Imbalance in Resource Sharing-
 The States have been nursing a feeling that the resource transfers to them have not been commensurate with their growing responsibilities. For instance, Central Government collects around 60% of the total taxes, while its expenditure responsibility (for carrying out its constitutionally mandated responsibility such as defense, etc.) is only 40% of the total public expenditure.

2. A “fragmented” transfer i.e. Conditional and Unconditional Grants is an important feature of the Indian federal fiscal arrangements between the union and the states.

3. Growing Central Expenditure on Functions in the State List. Growing discretionary transfers from the Centre have severely constrained the States in drawing and implementing schemes according to their priorities and the felt needs of people.

4. There are a number of Central legislations, the compliance and enforcement cost of which are entirely borne by the States. Central legislations, such as, the Environment Protection Act, the Wildlife Protection Act etc. At present, States are not compensated for the cost of compliance and the revenue loss on account of compliance.

5. The realization from the sale of spectrum mainly depends on the market for telecom and related services available in a State, but accrued entirely by the Centre.

6. The TOR of the 15 th  FC have also raised concerns.
 Among a group of southern states on the use of the population of each state as recorded in the 2011 census for the determination of resource needs.
 Measurable performance-based incentives as an effort to introduce conditionality-driven transfers through the Finance Commission.

The Punchi Commission has made recommendations to strengthen the fiscal relations which are as follows-
1. A comprehensive review of all transfers to States with a view to minimizing the component of discretionary transfers, particularly those channeled through CSS.
2. As the resources at the command of the States are limited, we recommend higher Central transfers to backward States to enable them to improve their physical and human infrastructure.
3. A part of the sale proceeds of spectrum should be devolved to States for expenditure on infrastructure projects.
4. The current ceiling on profession tax should be completely done away with by a Constitutional amendment.
5. All future Central legislations involving States’ involvement should provide for cost sharing as in the case of the RTE Act. Existing Central legislations where the States are entrusted with the responsibility of implementation should be suitably amended providing for sharing of costs by the Central Government.
6. The ToR of future Finance Commissions should be formulated in such a way that the additional commitments of States on account of pay revision are fully taken into account.

Creating the new fiscal federal architecture based on the effective decentralization, transparent GST regime, independent Finance commission and effective NITI Aayog can strengthen India’s unique cooperative federalism.