Elections over, time for Regional bill, and State Finance Commission

SB - excellent thread. I had similar thoughts when I wrote the flwg on the another thread here.

Briefly, if states were mandated to collect all taxes from within their areas, including income-tax, sales tax, central excise, commercial taxes, etc. & share such collections with the central govt on say, a 60-40 basis, as also budget for expenditures in the same ratio (viz. 60-40), this alone would lead to much better performance as follows :

1) States will have incentives to improve tax collections since they benefit if the collection is larger, thus there would be better efforts followed by much higher collections.
2) Budget allocations under various heads will be dependent on priorities as decided by the concerned state & not based on a centrally administered budget, in most cases.
3) There is greater chance for better checks on corruption since the state becomes more directly responsible for collections, especially with reference to income-tax, which is being dodged by a staggeringly huge mass of people.
4) Competition between states will also help push efforts to collect more income tax from all those that fall under the net, but do not pay up.
5) No mutterings such as "Maharashtra contributes so much but gets so little".

The idea is to employ a closed loop within each state, as much as possible & escape the centrally administered budget funding & the inherent biases & inefficiencies based mostly on party considerations & political compulsions that have notoriously been plaguing the country & retarding it's progress. There will thus be "rich" states & "poor" states, & the rich states will be able to better address their priorities directly, whilst the poor states will aspire to improve & get on par with other rich states - a healthy economic competition will brew up, instead of state heads & party leaders making numerous trips to Delhi to get something sanctioned, which again depends on the central govt's own political compulsions.

Exceptions will of course be :
1) Poverty elimination programs where some states will be much more dependent on central assistance than others, based on human development & financial health of individual states.
2) Defense budgeting.
3) Foreign affairs.
4) Calamities funds.

Though railways & other national services such as highways, ports & harbors need to be administered centrally, development would take place based on state contributions also & budget sharing, thus, it would depend on what the state wants & not based on central govts own priorities.

Collection of all taxes locally at source is on one extreme, but we need to push for reducing the problem of an overlong, indirect chain between what is paid by local users (a growth sector) & the funds that are brought back to bear for local needs - development, services & maintenance. In fact, there is no close relation nor correspondence between revenues generated locally & resources allocated for development, demand & maintenance - thus, the system is deficient & weak as it more or less depends on 'political' needs of the ruling party rather than actual.

Escaping budget funding by creating closed loops with dedicated funds to a much larger extent than at present, wherever possible is also, perhaps the best way to involve citizens more actively as the ward committees will become more directly responsible for addressing local citizens' grievences & accounting of cash flows.

@SB: Good start!

Look at this USAID (India) report for some insight. 

Here is the link to the PDF. 

Take your time to read to understand the intricacies involved. Covers, among many other things, how SFCs evolved and performed (generally poor), how devolution of powers and functions to ULBs are undermined by local unwillingness to pay for services, and ULB fiscal powers &  fund transfer criterion.

I happened across this UI/USAID document quite some time ago, finding info on state of ULBs in India. Quite an informative read. 

Seems like it is a project initiative by Urban Institute, in collaboration w/ USAID (India).  One of the authors is from National Institute of Public Finance & Policy, New Delhi. Here is what the document has to say:

The Urban Institute (Washington, D.C.), with support from the United States Agency for International Development/India (USAID India) has reviewed the performance of the State Finance Commissions (SFCs) in the context of the emerging decentralization framework.

BTW, as a side note, I have also seen tonnes of informative pieces to read on USAID website. 

States have been reluctant partners in the process, with many of them showing unwillingness to devolve responsibilities and revenue sources as contemplated by the 74th Amendment. Urban local bodies for the most part have expressed little desire to take on additional service responsibilities, have rejected efforts to transfer taxing authority to them, and have rarely made full use of the discretionary taxing authority now available to them

If ULB's delegated the powers of managing the ward level infrastructure to the ward committes, then they will have enough bandwidth to take on revenue collection responsibilities. We as citizens need to push this to happen.