Federalism(Federation) refers to a multilevel system of government in which entities suchas states or province and subnational government share its power with a central(federal) government. Federalism is a form of government in which sovereigntyor political power is divided between the central and the local government, sothat each of them within its own sphere is independent of the other (RobertGorson). Federalism is not only a set offixed principle which is applicable to different historical conditions; ratherit is a principle of government has to evolve differently in differentsituations. In a federal system, the central government cannot order the stategovernment to do something.
The state government has its own power in whichthey are not answerable to the central government. In the federal form ofgovernment both the central as well as state government have responsibility andseparately answerable to the people related to political and economic issue ofthe country. In the recent years, the issues on federalism and decentralizationattracted worldwide interest throughout the countries. Federation of India ischaracterized by constitutional demarcation of financial powers and responsibilitiesamong the three levels of government, namely center, state and local government(Joshi and Jain 2016). Federal financial structure, budgetary aspects andfiscal transfers’ mechanism are the important factors which determine fiscalsystem of any federation. The fiscal system refers to the mechanism throughwhich financial resources for the government and its agencies are procured,channeled or raised, and the scale and pattern of allocation of such resourcesis determined.
In order to make a federal nation’s any layers of governmenti.e., centre (federal) as well as state government should have a sound fiscalposition in the country. Difference forms of federalism as shown in figure 1.