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June 14, 2026
The Dispatch

Definition

Fiscal Federalism

Fiscal federalism is the division of taxing powers, spending responsibilities and transfers between the central and state governments.

Fiscal federalism governs who taxes what, who spends on what, and how money flows between the Centre and states. In India the Constitution assigns major taxes to the Centre while states bear large spending responsibilities, creating a vertical gap bridged by devolution and grants via the Finance Commission.

GST added a layer of shared taxation managed by the GST Council, deepening cooperative federalism but also raising disputes over compensation and autonomy. Debates over cesses, centrally sponsored schemes and borrowing limits all fall under this umbrella.

Related terms

  • Devolution to StatesDevolution is the constitutionally mandated transfer of a share of the Centre's divisible tax pool to the states, as recommended by the Finance Commission.
  • Finance CommissionThe Finance Commission is a constitutional body set up periodically to recommend how tax revenues should be shared between the Centre and the states.
  • GST CouncilThe GST Council is the constitutional body that decides the rates, exemptions and rules of GST through consensus between the Centre and the states.

Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.