MPSC State Service 2021 · CSAT · Question 16 of 73

Passage: Read the following passage and answer the questions : Federal Finance in India Governments may be classified into unitary and federal depending upon the concentration and distribution of power and the relation between the central and local authorities. Under the unitary system, whole power of government is conferred by the constitution upon a single central organ and local governments derive whatever authority they possess from this central organ. This system of government is prevalent in the UK, France, Germany, Austria and most of the countries of Asia. As against the unitary system, federal system provides for a distribution and division of the individual states of which the federation is composed. The general principle of division of power is such that affairs of common interest to the federation as a whole and thus requiring uniformity of regulation are placed under the Central Government, while all local affairs are left to the state governments. The two classic examples of federal system are the USA and Canada. After Independence, India also opted for a federal system of government on the lines of the USA and Canada. The distribution of powers in countries adopting the federal system of government defines the financial relations between the central and the state governments. However, there are some special problems that have to be grappled within federal financial system. These are: (i) The sources of revenue assigned to the centre and the states should be adequate to enable them to fulfil the functions allotted to them. However, in modern states, it is frequently not possible to ensure this and it is highly unlikely that the needs and resources of each government will be exactly balanced. Therefore, it becomes necessary to evolve a mechanism of adjustments so that shortages and surpluses are evened out; (ii) Each government should have independent financial authority, i.e.. , each government should have separate sources of revenue, powers to levy taxes and borrow, and to incur expenditure to carry out its functions effectively; and (iii) A certain uniformity should be ensured in all areas of the federation so that no preference is given to one state over the other as regards payment of federal taxes. The present passage recommends this: (a) Independent financial authority in a federal system (b) Separate/Independent sources of revenue for each government (c) Powers to levy taxes (d) Equal disribution of federal revenue between central and state government

Reading Comprehension

1. A(a) only
2. B(a) and (b) only
3. C(a), (b) and (c) onlyCorrect
4. DAll of the above