For the administrative convenience, the British had divided India into provinces; three of which — Bengal, Madras, and Bombay were known as Presidencies.
The Presidencies were administered by a Governor and his three Executive Councils, who were appointed by the Crown.
The Presidency Governments possessed more rights and powers than other provinces. Other provinces were administered by Lieutenant Governors and Chief Commissioners appointed by the Governor-General.
The Act of 1861 marked the turning of the tide of centralization. It laid down that legislative councils similar to that of the center should be established first in Bombay, Madras, and Bengal and then in other provinces.
The provincial legislative councils also were mere advisory bodies consisting of officials and four to eight non-official Indians and Englishmen. They also lacked the powers or a democratic parliament.
The evil of extreme centralization was most obvious in the field of finance. The revenues from all over the country and from different sources were gathered at the center and then distributed by it to the provincial governments.
The Central Government exercised authoritarian control over the smallest details of provincial expenditure. But this system proved quite wasteful in practice. It was not possible for the Central Government to supervise the efficient collection of revenues by a provincial government or to keep adequate check over its expenditure.
The two governments constantly quarreled over minute details of administration and expenditure, and, on the other, a provincial government had no motive to be economical. The authorities therefore decided to decentralize public finance.
In 1870, Lord Mayo had taken the first step in the direction of separating central and provincial finances. The provincial governments were granted fixed sums out of central revenues for the administration of certain services like Police, Jails, Education, Medical Services, and Roads and were asked to administer them as they wished.
Lord Mayo's scheme was enlarged in 1877 by Lord Lytton who transferred to the provinces certain other heads of expenditure such as Land Revenue, Excise, General Administration, and Law and Justice.
To meet the additional expenditure, a provincial government was to get a fixed share of the income realized from that province from certain sources like Stamps, Excise Taxes, and Income Tax.
In 1882, Lord Ripon had brought some changes. The system of giving fixed grants to the provinces was ended and, instead, a province was to get the entire income within it from certain sources of revenue and a fixed share of the income.
Thus all sources of the revenue were now divided into three heads as −
Those to be divided between the center and the provinces.
The financial arrangements between the center and the provinces were to be reviewed every five years.