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Understanding Centre State Financial Relations in India (Articles 264-293)

March 28, 2024 3730 0

Introduction

Centre State Financial Relations, delineated in Part XII of the Indian Constitution (Articles 264-293), govern the distribution of financial resources and responsibilities between the central and state governments. These provisions outline mechanisms for revenue sharing, taxation powers, grants-in-aid, and other financial matters. The goal is to ensure fiscal autonomy for states while also maintaining financial stability and equity across the country. These relations play a crucial role in fostering cooperative federalism and ensuring the effective functioning of the Indian federal system.

Financial Relations can be studied under the following heads

  • Article 265: Taxes not to be imposed except by authority of law
  • Allocation of taxation powers
    • Union List/State List: Parliament/state legislature has exclusive power to levy taxes on subjects enumerated in the Union/State List.
    • Residuary Power: The residuary power is vested in the Parliament. Under this provision, the Parliament has imposed gift tax, wealth tax and expenditure tax.
    • Concurrent List: There are no tax entries in the Concurrent List. In other words, the concurrent jurisdiction is not available with respect to tax legislation.
  • Concurrent Powers for GST Legislation: However, The 101st Amendment Act of 2016 has made an exception by making a special provision with respect to GST. 
  • Constitutional Distinction: The Constitution along with some restrictions on the taxing power of the states, also draws a distinction between the power to levy and collect a tax and the power to appropriate the proceeds of the tax so levied and collected.
  • Distribution of Non-tax Revenues
    • Major Sources of Non-tax Revenues of the Centre:  (i) posts and telegraphs; (ii) railways; (iii) banking; (iv) broadcasting (v) coinage and currency; (vi) central public sector enterprises; (vii) escheat and lapse;19 and (viii) others.
    • Major Sources of Non-tax Revenues of the States: (i) irrigation; (ii) forests; (iii) fisheries; (iv) state public sector enterprises; (v) escheat and lapse; and (vi) others

GRANTS IN AID TO STATES

Statutory Grants Discretionary Grants
  • Art. 275: Grants to the states which are in need of financial assistance and not to every state
  • Charged on the Consolidated Fund of India  every year.
  • Art 282: Empowers both the Centre and the states to make any grants for any public purpose, even if it is not within their respective legislative competence.
  • These grants form the larger part of the Central grants to the states
  • The Constitution also provides for specific grants for promoting the welfare of the scheduled tribes in a state or for raising the level of administration of the scheduled areas in a state (including the State of Assam).
  • These grants are also known as discretionary grants, the reason being that the Centre is under no obligation to give these grants and the matter lies within its discretion.
  • The statutory grants under Art. 275 are given to the states on the recommendation of the Finance Commission.
  • These grants are to help the state financially to fulfill plan targets and to give some leverage to the Centre to influence and coordinate state action to effectuate the national plan.
Other Grants
  • The Constitution also provided for a third type of grants-in-aid, but for a temporary period. A provision was made for grants in lieu of export duties on jute and jute products to the States of Assam, Bihar, Orissa and West Bengal.
  • These grants were to be given for a period of ten years from the commencement of the Constitution.
  • These sums were charged on the Consolidated Fund of India and were made to the states on the recommendation of the Finance Commission.
Protection of the State’s interest  Following bills can be introduced in the Parliament only on the recommendation of the President (Art.274):

  • Bill which imposes or varies any tax or duty in which states are interested;
  • Bill which varies the meaning of the expression “agricultural income”;
  • Bill which affects the principles on which money are or may be distributable to states;
  • Bill which imposes any surcharge on any specified tax or duty for the purpose of the center.

“Tax or duty in which states are interested”:

  • A tax or duty the whole or part of the net proceeds whereof are assigned to any state; or 
  • A tax or duty by reference to the net proceeds where of sums are for the time being payable, out of the Consolidated Fund of India to any state.

Net Proceed (Art. 279):  The proceeds of a tax or a duty – the cost of collection

  • It is ascertained and certified by the CAG. His certificate is final.
Borrowing by the Centre and the States
  • Center (Art. 292)
  • State (Art. 293)
  • Can borrow on CFI (Within + Outside India) within limits fixed by parliament.
  • Can make loans to any state or give guarantees in respect of loans raised by any state.
  • Cannot raise any loan without center consent (If there is an outstanding loan to center)
  • Can borrow on CFS (Within not outside India) within limits fixed by parliament
Exemption of Union property from taxation of state 

(Art. 285)

  • Centre’s property is exempted from all taxes imposed by a state or any authority within a state like municipalities, district boards, panchayats and so on. But the Parliament is empowered to remove this ban.
  • The property may be used for sovereign (like armed forces) or commercial purposes.
  • The corporations or the companies created by the Central government are not immune (as they are separate legal entities) from state taxation or local taxation.
Exemption of State property from central taxation 

(Art.289)

  • The property and income of a state is exempted from Central taxation. Such income may be derived from sovereign functions or commercial functions.
  • But the Centre can tax the commercial operations of a state if Parliament provides so.
  • The property and income of local authorities situated within a state are not exempted from Central taxation.
  • Likewise, the property or income of corporations and companies owned by a state can be taxed by the Centre.
  • The Centre can impose customs duty on goods imported or exported by a state, or an excise duty on goods produced or manufactured by a state – advisory opinion of the Supreme Court, 1963.
Effects of Emergency National Emergency (Art. 352) Financial Emergency (Art. 360)
  • The President can modify the constitutional distribution of revenues between the Centre and the states.
  • Can either reduce or cancel the transfer of finances (both tax sharing and grants-in-aid) from the Centre to the states.
  • Such modification continues till the end of the financial year in which the emergency ceases to operate.
  • Center can give directions to the states:
  • To observe the specified canons of financial propriety.
  • To reduce the salaries and allowances of all class of persons serving in the state; and
  • To reserve all money bills and other financial bills for the consideration of the President.

Distribution of Tax revenues

Article Levy Collection Appropriation Various Taxes
268 Centre States States
  • Stamp duties on shares, cheque, promissory notes, insurance etc.
269 Centre Centre States
  • Taxes on interstate trade and commerce. 
  • Revenues do not form part of the consolidated fund of India.
270 Centre Centre Shared between Centre and states
  • All taxes and duties in the union list except Duties and taxes referred to in Articles 268, 269 and 269-A
  • Surcharge on taxes and duties referred to in Article 271
271 Centre Centre Centre
  • Surcharge on taxes under Art 269, 270.
  • Goods and Services tax (GST) is exempted from this surcharge. This surcharge can’t be imposed on the GST.
Others

  • Levy and Collection of GST in Course of Inter-State Trade or Commerce (Article 269-A)
  • Taxes Levied and Collected and Retained by the States: These are the taxes belonging to the states exclusively eg: land revenue, tax on mineral rights, etc.

Committees on Centre-State Relations

By Center By State
  • Sarkaria Commission (1983)
  • Punchhi Commission (2007)
  • Administrative Reforms Commission I and II
  • Rajamannar Committee – Tamilnadu
  • Anandpur Sahib Resolution – Akali Dal of Punjab

 

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Conclusion

  • While the Constitution provides mechanisms for revenue sharing and grants, the evolving dynamics necessitate continuous dialogue and cooperation between the central and state governments to address fiscal challenges effectively. 
  • This relationship underscores the importance of collaborative decision-making and resource allocation in ensuring equitable development and fiscal stability across the nation.
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 Final Result – CIVIL SERVICES EXAMINATION, 2023.   Udaan-Prelims Wallah ( Static ) booklets 2024 released both in english and hindi : Download from Here!     Download UPSC Mains 2023 Question Papers PDF  Free Initiative links -1) Download Prahaar 3.0 for Mains Current Affairs PDF both in English and Hindi 2) Daily Main Answer Writing  , 3) Daily Current Affairs , Editorial Analysis and quiz ,  4) PDF Downloads  UPSC Prelims 2023 Trend Analysis cut-off and answer key

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Quick Revise Now !
UDAAN PRELIMS WALLAH
Comprehensive coverage with a concise format
Integration of PYQ within the booklet
Designed as per recent trends of Prelims questions
हिंदी में भी उपलब्ध

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