Financial Relations between Centre and State in India

Financial Relations between Centre and State (Centre State Financial Relations) in India are determined by the Indian Constitution, which divides taxing powers between the Centre and the states. The Union List gives the exclusive authority to impose taxes on subjects listed in it to the Parliament, while the State List gives the state legislature the exclusive power to levy taxes on subjects listed in it. The Concurrent List does not have any tax-related entries, but an exception was made through the 101st Amendment Act of 2016, introducing a special provision for goods and services tax. The Parliament holds the residual power of taxation, enabling it to impose taxes on subjects not mentioned in any of the three lists.
Financial relations between centre and state will be helpful for UPSC IAS Exam preparation. GS Paper-2 Indian Polity.

Content of Table

• Centre State Financial Relations in India
• Taxing Powers Allocation
• Restrictions on taxing power of the States
• Tax Revenue Allocation
• Non-tax Revenues Allocation
• Grants-in-aid
• Conclusion
• Frequently Asked Questions (FAQs)

Financial Relations between Centre and State in India

• The way financial resources are distributed plays a crucial role in determining how the State interacts with the Centre.
• According to the Constitution, both the Union and the State have their own independent sources of revenue.
• The Parliament has the authority to impose taxes on matters listed under the Union List, while the States can impose taxes on matters listed under the State List.
• Generally, taxes that have an interstate impact are imposed by the Centre, while taxes with a local impact are imposed by the State.
• The Constitution’s Part XII, specifically Articles 268 to 293, discusses the financial relations between the Centre and the states.
• Additionally, there are other provisions that address the same topic.

Taxing Powers Allocation

The distribution of taxing powers is outlined in the Constitution, dividing them between the Centre and the states as follows:

Union List

• The exclusive authority to impose taxes on subjects listed in the Union List rests with the Parliament.
• There are a total of 13 subjects in this list.

State List

• The state legislature possesses exclusive power to levy taxes on subjects listed in the State List.
• There are a total of 18 subjects in this list.

Concurrent List

• There are no tax-related entries in the Concurrent List, indicating that tax legislation falls outside concurrent jurisdiction.
• However, an exception was made through the 101st Amendment Act of 2016, introducing a special provision for goods and services tax.
• This amendment grants concurrent power to both the Parliament and State Legislatures to enact laws governing goods and services tax.

Residual Power

• The Parliament holds the residual power of taxation, enabling it to impose taxes on subjects not mentioned in any of the three lists.
• This provision has been utilized by the Parliament to impose a gift tax, wealth tax, and expenditure tax.

Restrictions on taxing power of the States

The taxing powers of the states are subject to the following restrictions as per the Constitution:

• A state legislature is empowered to impose taxes on professions, trades, callings, and employments, but the total amount of such taxes paid by an individual must not exceed ₹2,500 per year.
• There are specific cases where a state legislature is prohibited from imposing taxes on the supply of goods or services, both occurring outside the state or as part of import or export activities.
  • The Parliament holds the authority to establish principles for determining whether a supply takes place outside the state or in the course of import or export.
• Regarding electricity, a state legislature can impose taxes on its consumption or sale.
  • However, it cannot levy taxes on electricity consumed or sold by the Centre or used in the construction, maintenance, or operation of railways by the Centre or railway companies for the same purpose.
• A state legislature has the ability to enact tax laws concerning water or electricity stored, generated, consumed, distributed, or sold by authorities established by Parliament to regulate or develop inter-state rivers or river valleys.
  • However, such a law must be submitted for the President’s consideration and obtain his approval to be effective.

Tax Revenue Allocation

Modifications have been made to the distribution of tax revenues between the central government and the states through the 80th Amendment Act of 2000 and the 101st Amendment Act of 2016.

These amendments have brought about substantial alterations in the existing framework.

Centre-Managed Taxes with State Appropriation (Article 268)

• This category comprises stamp duties on various instruments such as bills of exchange, cheques, promissory notes, insurance policies, and share transfers.
• The revenue generated from these duties within a state is not added to the Consolidated Fund of India but is assigned to that particular state.

Centre-Levied and State-Assigned Taxes (Article 269)

• The following taxes fall under this category:
  • Taxes on the sale or purchase of goods (excluding newspapers) during inter-state trade or commerce.
  • Taxes on the transportation of goods during inter-state trade or commerce.
• The proceeds from these taxes do not become part of the Consolidated Fund of India. Instead, they are assigned to the respective states based on principles established by the Parliament.

Goods and Services Tax (GST) in Inter-State Trade or Commerce (Article 269-A)

• The Centre is responsible for levying and collecting the GST on supplies made during inter-state trade or commerce.
  • However, the distribution of this tax between the Centre and the states is determined by the Parliament, following recommendations from the GST Council.
• Additionally, the Parliament is authorized to formulate principles for determining the place of supply in inter-state trade or commerce.

Centre-Collected Taxes Distributed between Centre and States (Article 270)

• This category encompasses all taxes and duties mentioned in the Union List, excluding the following:
  • Duties and taxes specified in Articles 268, 269, and 269-A.
  • Surcharge on taxes and duties mentioned in Article 271.
  • Any specific-purpose cess.
• The President, upon the recommendation of the Finance Commission, determines the manner of distributing the net proceeds from these taxes and duties.

Surcharge on Taxes and Duties for Centre’s Purposes (Article 271)

• The Parliament has the authority to impose surcharges on taxes and duties referred to in Articles 269 and 270.
• The revenue generated from these surcharges is solely allocated to the Centre, with no share given to the states.
• However, the Goods and Services Tax (GST) is exempted from such surcharges.

State-Exclusive Taxes (State List)

• These taxes, which belong exclusively to the states, are listed as follows:
  • Land revenue
  • Taxes on agricultural income (iii) Duties on succession to agricultural land (iv) Estate duty on agricultural land
  • Taxes on lands and buildings
  • Taxes on mineral rights
  • Excise duties on alcoholic liquors for human consumption, opium, Indian hemp, and other narcotic drugs and narcotics (excluding medicinal and toilet preparations containing alcohol or narcotics)
  • Taxes on electricity consumption or sale etc.

Allocation of Non-tax Revenues

Centre’s Receipts

The Centre derives its significant non-tax revenues from various sources, including:

• Postal and telegraph services
• Railways
• Banking
• Broadcasting
• Coinage and currency
• Central public sector enterprises
• Escheat and lapse
• Other sources

States’ Receipts

The state’s major sources of non-tax revenues consist of:

• Irrigation
• Forests
• Fisheries
• State public sector enterprises
• Escheat and lapse
• Other sources

Grants-in-aid

In addition to the division of taxes between the Centre and the states, the Constitution includes provisions for grants-in-aid from Central resources to the states.

Two categories of grants-in-aid: Statutory and Discretionary.

Statutory Grants

• Article 275: It grants the Parliament the power to provide financial assistance to states that require it, but not to every state. Different amounts may be allocated to different states. These sums are sourced from the Consolidated Fund of India annually.
• Specific Grants: The Constitution also allows for specific grants aimed at promoting the well-being of scheduled tribes within a state or enhancing administrative standards in scheduled areas, including the state of Assam.
• The statutory grants under Article 275, both general and specific, are awarded to states based on the recommendations of the Finance Commission.

Discretionary Grants

• Article 282: It empowers both the Centre and the states to provide grants for public purposes, even if they fall outside their respective legislative jurisdictions.
  • As per this provision, the Centre extends grants to the states.
• These grants, known as ‘discretionary grants’, are not obligatory for the Centre. They serve a dual purpose:
  • Assisting states financially in achieving plan targets and
  • Allowing the Centre to influence and coordinate state actions in line with the national plan.

Other Grants

• The Constitution also establishes a temporary category of grants-in-aid. Specifically, grants in lieu of export duties on jute and jute products were designated for the states of Assam, Bihar, Orissa, and West Bengal.
• These grants were scheduled to be provided for ten years from the commencement of the Constitution.
• The sums allocated were charged to the Consolidated Fund of India and were dispensed to the states based on recommendations from the Finance Commission.

Conclusion

The Seventh Schedule of the Indian Constitution broadly demarcates the functions of the Union and the states. The distribution of tax revenue is categorized into different articles, specifying the taxes assigned to states, taxes assigned based on principles established by the Parliament, and the role of the Centre in levying and collecting Goods and Services Tax (GST). Additionally, the Constitution provides for grants-in-aid, including statutory grants allocated based on recommendations of the Finance Commission and discretionary grants aimed at assisting states in achieving plan targets while allowing the Centre to influence state actions. Furthermore, temporary grants were designated for specific states and charged to the Consolidated Fund of India, disbursed based on recommendations from the Finance Commission.

Ref:

Source-1

FAQs(Frequently Asked Questions)