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.

Keywords:

Finance commission Fiscal federalism Vertical Fiscal Imbalance