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

• 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.

• 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.

• 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.

• 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

(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.

(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.

• 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.

• Stamp duties on shares, cheque, promissory notes, insurance etc.

• Taxes on interstate trade and commerce. 
• Revenues do not form part of the consolidated fund of India.

• 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

• 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.

• 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.

• Sarkaria Commission (1983)
• Punchhi Commission (2007)
• Administrative Reforms Commission I and II

• Rajamannar Committee – Tamilnadu
• Anandpur Sahib Resolution – Akali Dal of Punjab