Vertical Fiscal Imbalance
Published on 07 Jan 2025
Vertical Fiscal Imbalance (VFI)
• Experts opined that the role of the 16th Finance Commission should be to eliminate vertical fiscal imbalance in federal relations.
• An imbalance generally occurs when a government’s spending (and resulting debt) outstrips its long-term ability to raise revenue to finance its spending and debt.
• A vertical fiscal imbalance occurs when revenues do not match expenditures for different levels of government.
• The problem of VFI falls under the purview of the Finance Commission, and it deals with broadly two questions.
- The first question is how to distribute the taxes collected by the Union government to the States as a whole.
- These transfers are made as a prescribed share of the “Net Proceeds” (Gross Tax Revenue of the Union less surcharges, cesses and costs of collection).
- The second question is how to distribute taxes across States.
- The matter of VFI arises as part of the first
question.
