What is VFI?

The Union Government is endowed with more Tax powers than the states, while the states are assigned more expenditures responsibilities than Union government. This leads to VFI between states and union. The main responsibility of finance commission (A-280) is to correct this.

Understanding VFI:

An empirical measure of VFI is "VFI=1-Ratio of states own revenue to own expenditure". If VFI ratio is zero, then states have enough to meet their expenditure. 
A look over past 3 finance commissions shows there is an increase in trend. The ratio was 0.530 which means only 43% of states own revenue was financed by themselves.

Solution proposed by Experts:

  1. Reassigning tax powers between union and states: The union government has exclusive power to levy excise duty and states have exclusive power to levy excise duty, sales tax on liquor. All other commodities fall under GST. Experts propose that CGST and excise duty on petro products be assigned to states.
  2. Veto powers of union government should be removed. Then, the GST council truely will become a body by the states to settle tax issues among themselves, thereby union government as facilitator.