Horizontal Federal Fiscal Imbalance:

This imbalance refers to the non-correspondence between the fiscal resources and expenditure commitments across sub-central (State) governments.  This arises mainly due to the differences in the size of geographical area, population, climate, endowment of natural resources with uniform tax powers and functional responsibilities. Horizontal equity can be achieved in a federation with a system of fiscal transfers especially of grants-in-aid provided to states on the basis of an equalizing  and rational criteria. As long as the tax powers are distributed between the Centre and the sub-Central governments on the basis of efficiency, equity aspects  assume importance. Besides these equity issues, the following aspects are to be noted with regard to taxation in relation to  decentralized system especially of the local governments.