Q81. What is the most appropriate description of the function of the State Finance Commission (SFC)?
Fiscal Federalism and Finance Commission: RAS Prelims MCQs
99 RAS Prelims MCQs on fiscal federalism and the Finance Commission cover the constitutional financial provisions, the sharing of taxes between the Union and States, and the GST framework. The Articles on the Consolidated Fund and Contingency Fund, the duties of the Finance Commission and the criteria it uses are asked as facts and statements.
Practice questions based on the RPSC RAS Prelims syllabus. They follow the exam pattern but are not past-paper questions.
Showing 81–90 of 99 questions
Q82. Which of the following statements about fiscal decentralisation in India is correct?
Explanation
Despite constitutional mandates, the actual level of fiscal decentralization varies widely. Many state governments are hesitant to transfer significant financial powers or revenue sources to local bodies, preferring to maintain central control over expenditures. This reluctance often limits the effectiveness of Panchayats and Municipalities, as they remain dependent on state-level grants rather than having their own robust and independent revenue streams.
Q83. Match the Articles of the Constitution in List I with their provisions regarding local bodies in
List II:
List I: (Article of the Constitution)
A. Article 243H
B. Article 243I
C. Article 243W
D. Article 243Y
List II: (Provision regarding local bodies)
i. Constitution of State Finance Commission for Panchayats
ii. Powers to impose taxes by, and Funds of, the Panchayats
iii. Constitution of State Finance Commission for Municipalities
iv. Powers, authority and responsibilities of Municipalities
Choose the correct answer:
List II:
List I: (Article of the Constitution)
A. Article 243H
B. Article 243I
C. Article 243W
D. Article 243Y
List II: (Provision regarding local bodies)
i. Constitution of State Finance Commission for Panchayats
ii. Powers to impose taxes by, and Funds of, the Panchayats
iii. Constitution of State Finance Commission for Municipalities
iv. Powers, authority and responsibilities of Municipalities
Choose the correct answer:
Explanation
The 73rd and 74th Amendments introduced articles to ensure local bodies have financial autonomy and structured support. Article 243H and 243W define the powers and responsibilities of Panchayats and Municipalities respectively. Meanwhile, Articles 243I and 243Y mandate the Governor to constitute State Finance Commissions to review the financial health of these local bodies and recommend sustainable revenue-sharing models.
Q84. In the context of the history of Finance Commissions, select the correct chronological order of the Chairpersons of the Finance Commission of India:
Explanation
The Finance Commission of India is a constitutional body established every five years. Its leadership history began with K.C. Neogy as the first chairman in 1951. Over the decades, prominent figures like Mahavir Tyagi, who led the fifth commission, and Y.B. Chavan, who led the eighth, have served, culminating recently with N.K. Singh for the fifteenth. Each chairperson has shaped the nation’s fiscal landscape.
Q85. The concept of "Fiscal Capacity Distance" used in the horizontal distribution formula essentially measures:
Explanation
Fiscal capacity distance measures the potential of a state to raise revenue based on its economic base, such as per capita income. It identifies the gap between a state’s revenue potential and that of the strongest state. By using this metric, the Finance Commission can direct more funds to states with lower fiscal capacity, helping them provide essential public services more equitably.
Q86. Which of the following statements is incorrect regarding the borrowing powers of States in India?
Explanation
Under the Indian Constitution, states have the power to borrow within the country, but they cannot access international markets directly. Any foreign borrowing or loans from international agencies must be facilitated and approved by the Central Government. Furthermore, if a state has outstanding central loans, it must obtain the Union’s consent before raising any new domestic debt, ensuring national fiscal discipline.
Q87. Consider Statement I and Statement II regarding the tax devolution formula.
Statement I: The "Forest and Ecology" criterion was included in the devolution formula to compensate states for the opportunity cost of maintaining forest cover.
Statement II: States with high forest cover lose out on potential agricultural or industrial revenue.
Statement I: The "Forest and Ecology" criterion was included in the devolution formula to compensate states for the opportunity cost of maintaining forest cover.
Statement II: States with high forest cover lose out on potential agricultural or industrial revenue.
Explanation
The "Forest and Ecology" criterion recognizes that states with large forest covers provide ecological benefits to the whole country but lose out on economic development. By maintaining forests instead of developing land for industry or agriculture, these states face an opportunity cost. The Finance Commission compensates them through tax devolution, incentivizing conservation while helping these states manage their specific developmental needs.
Q88. "Sub-national bankruptcy" is generally avoided in the Indian fiscal federal system through:
Explanation
To maintain financial stability, the Indian system places strict limits on state borrowing. The Constitution and the FRBM Act ensure that states do not accumulate unsustainable debt. The Reserve Bank of India acts as the debt manager for states, coordinating their market borrowings. These mechanisms prevent "sub-national bankruptcy" by ensuring that states operate within their means and maintain overall macroeconomic balance.
Q89. Which institution conducts the audit of the accounts of the Union and of the States to ensure fiscal accountability in India’s federal structure?
Explanation
The Comptroller and Auditor General is a constitutional authority responsible for auditing the accounts of both the Union and the State governments. This independent audit ensures that public money is spent legally and efficiently. By providing detailed reports to the respective legislatures, the CAG promotes fiscal accountability and transparency, which are essential for the healthy functioning of a federal financial structure.
Q90. The "Tax Effort" criterion in the Finance Commission’s devolution formula is designed to:
Explanation
The tax effort criterion is designed to encourage states to maximize their own revenue generation. It rewards states that show higher efficiency in collecting taxes compared to their estimated fiscal capacity. By including this in the devolution formula, the Finance Commission motivates states to improve their administrative systems and reduce tax evasion, thereby strengthening their own financial health and reducing dependency.Answer key for these questions
| Q | Correct answer |
|---|---|
| 81 | (a) Recommending tax revenue distribution between the State and local bodies |
| 82 | (c) State Governments are often reluctant to devolve financial powers to local bodies |
| 83 | (a) A-ii, B-i, C-iv, D-iii |
| 84 | (b) K.C. Neogy -- Mahavir Tyagi -- Y.B. Chavan -- N.K. Singh |
| 85 | (b) The capacity of a state to generate tax revenue relative to its population |
| 86 | (d) States can borrow from foreign countries and international institutions directly without Centre’s approval. |
| 87 | (a) Both Statement I and Statement II are correct |
| 88 | (c) Constitutional borrowing constraints and the RBI’s role as a debt manager |
| 89 | (a) Comptroller and Auditor General of India |
| 90 | (d) Reward states demonstrating efficiency in tax collection relative to capacity |
Key facts from Fiscal Federalism and Finance Commission
- The President appoints the Chairman and members of the Finance Commission; Article 280(3) lists its duties, including the distribution of net proceeds of taxes.
- Article 266 provides for the Consolidated Funds; the Contingency Fund is at the disposal of the President.
- Article 268 covers Union-levied duties that are collected and kept by the States.
- Horizontal fiscal imbalance among States is addressed by the tax devolution formula recommended by the Finance Commission; revenue deficit grants help States that cannot meet basic needs.
- The 15th Finance Commission dropped the criterion of the 1971 population for horizontal devolution.
- The GST Council is an example of cooperative federalism; the GST Compensation Cess was extended to March 2026 to repay back-to-back loans of the Centre.
Frequently asked questions
How many RAS Prelims practice MCQs are there on Fiscal Federalism and Finance Commission?
This page has 99 practice MCQs on Fiscal Federalism and Finance Commission (Indian Economy). Each has the correct answer, and most have an explanation.
Who appoints the Finance Commission?
The President of India, under Article 280, every five years or earlier. The Commission recommends how the net proceeds of taxes are shared between the Union and the States and among the States.
Which Article lists the duties of the Finance Commission?
Article 280(3). It sets out the duties, including recommending the distribution of the net proceeds of taxes between the Union and the States and the principles that govern grants-in-aid to States.
What kind of federalism does the GST Council show?
Cooperative federalism. The Council, with the Union Finance Minister as chairperson and State Finance Ministers as members, takes decisions on GST rates and rules jointly, and the votes of the Centre and States are weighted.