Today we’d be discussing one of the hot topics in Indian Politics, especially after the introduction of the Goods and Services Tax (GST), introduced by the Central Government on 1st July 2017. We’ve all observed sour relations between the Central Government and State Governments ruled by the Opposition Parties due to the financial relations between centre and state, especially in terms of compensation guaranteed by the Centre to the states while implementing the Goods and Service. So, it’s very important to have detailed knowledge about the financial relations between the centre and state and the constitutional provisions regarding such relations.
Financial Relations between Centre and State
Articles regarding the financial relations
Articles 268 and 293 under Part XII of the Indian Constitution deals with the financial relations between Centre and State. Apart from these articles, there are other provisions dealing with the issue.
Division of Powers
The Constitution of India provides for the division of taxing powers between the Central and State Governments. The provisions are-
- The Parliament of India has exclusive powers to levy taxes on subjects mentioned in the Union List.
*The Constitution of India divides legislative powers between the Centre and States by virtue of the 7th Schedule of the Constitution, which mentions three lists- Union List (on which the Parliament has exclusive powers to legislate), State List (on which the State Legislature has exclusive powers to legislate) and Concurrent List (on which both the State and Central Legislature exercise combined authority). Residuary powers, i.e. powers to legislate on subjects that are not included in either of the three lists, are vested in the hands of the Parliament
- The State Legislature has exclusive powers to levy taxes on subjects included in the State List.
- In the case of Concurrent List, there are no tax entries in it. However, through the 101st Constitutional Amendment Act of 2016, a special provision has been made with respect to Goods and Services Tax (GST). This amendment makes provision that allows both the Parliament and State Legislatures to make laws governing the Goods and Services Tax.
- The Residuary powers of taxation are vested in the hands of the Parliament. The Parliament has used this power to impose wealth tax, expenditure tax and gift tax.
Restriction on taxing powers of the States
- State Legislature has the powers to impose taxes on trades, employments, callings and professions. However, the total amount of such taxes payable by any person should not exceed 2500 Rupees per anum.
- State Legislature has the power to impose taxes on the consumption and sale of electricity. But however, the State Legislature cannot impose taxes on the consumption or sale of electricity that is consumed by or sold to the Centre and; Electricity sold or consumed in the construction, maintenance or operation of any railway by the Centre or by the concerned railway company or sold to the Centre or railway company for the same purpose.
- A State Legislature cannot impose taxes on goods or services or both if-
- their supply takes place outside the state
- such supply takes place in the course of imports or exports
- A State Legislature has the power to impose taxes in respect of any water or electricity stored, generated, consumed, distributed or sold to any authority established by the Parliament of India for regulating or developing any inter-state river or river valley. But the law for the following passed by the State Legislature shall be reserved for President’s consideration. And such a law would be effective only after President’s assent.
Distribution of revenues between Centre and States
Another most important aspect of the financial relations between centre and state is the distribution of the tax and non-tax revenues between the Centre and States. So, we’d be discussing the provisions for this distribution and various articles of the Constitution associated with it.
Distribution of tax revenues
This article deals with provisions regarding taxes that are levied by the Centre but collected and appropriated by the States. Main taxes/duties of this category include stamp duties on-
- promissory notes
- bills of exchange
- transfer or shares
- policies of insurance
The money collected by levying such duties goes to the States and does not form part of the Consolidated Fund of India.
Article 269 deals with the provisions regarding the taxes collected by the Centre but are assigned to the States. The taxes in this category are-
- Taxes on the sale or purchase of goods (other than newspapers) in the course of inter-state trade or commerce.
- Taxes on the consignment of goods in the course of inter-state trade or commerce.
The money collected from these taxes is assigned to the concerned States according to the principles laid down by the Parliament of India. Hence, money from these taxes also does not form part of the Consolidated Fund of India.
This article deals with the provisions regarding the levy and collection of Goods and Services tax in course of inter-state trade or commerce.
Through this article, the Goods and Services Tax (GST), on the supply of goods and services in inter-state trade and commerce are levied and collected by the Centre. But the funds collected from this tax are divided between the Centre and the States according to the provisions and principles laid down by the Parliament.
This article deals with the provisions regarding the taxes levied and collected by the Centre but are divided between the Centre and States. This category of taxes includes all the taxes that are mentioned in the Union List. However, there are some exemptions-
- Duties and taxes which are mentioned in Articles 268, 269 and 269-A.
- Surcharge on certain taxes and duties for purposes of the Centre, under Article 271.
- Any cess levied by the Centre for specific purposes.
The President of India, on recommendations of the Finance Commission, prescribes the manner in which the funds collected through these taxes and duties shall be distributed.
Article 271 deals with the surcharge on certain taxes and duties for purposes of the Centre.
Through this article, the Parliament has the power to levy a surcharge anytime on taxes and duties as mentioned in Articles 269 and 270. The funds collected from such surcharges would go directly and exclusively to the Centre and the States have no share in them.
However, the surcharges cannot be imposed on GST.
Taxes levied and collected and retained by the States
These are the taxes that are levied by the States, collected by the States and the funds collected belongs exclusively to the states. They are-
- Taxes on agricultural income.
- Duties in respect to the succession of agricultural land
- estate duty in respect of agricultural land
- land revenue
- taxes on lands and buildings
- taxes on mineral rights
- taxes on the consumption and sale of electricity
- taxes on goods and passengers carried by road or inland railways
- taxes on vehicles
- taxes on animals and boats
- taxes on the sale of petroleum crude, high-speed diesel, motor spirit (petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption
- taxes on professions, trades, callings and employments
- taxes on entertainment and amusements to the extent levied and collected by a Panchayat, or a Municipality or a Regional Council or District Council
- capitation taxes
- stamp duty on documents
- fees on the matters enumerated in the State List
- duties of excise on alcoholic liquors for human consumption; opium, Indian hemp and other narcotic drugs and narcotics, but not including medicinal and toilet preparations containing alcohol or narcotics
Distribution of non-tax revenue
The distribution of non-tax revenue between the Centre and the State is also a major detriment of the financial relations between Centre and State.
Non-tax revenue of the Centre
The major sources of the non-tax revenue of the Centre are-
- posts and telegraphs
- coinage and currency
- central public sector enterprises (CPSEs)
- escheat and lapse
- *escheat means property or money for which no owner could be found and for that reason, it becomes the property of the State
Non-tax revenue of the States
Major sources of non-tax revenue of the States are-
- state public sector enterprises (SPSEs)
- escheat and lapse
Grants-in-Aid to the States
There are various provisions in the Constitution that provide for grants to the States from the resources of the Centre. The two types of grants are- Statutory Grants and Discretionary Grants.
Statutory Grants (Article 275)
Under Article 275, the Parliament is empowered to provide grants to the States that are in need of such grants. These grants are given from the Consolidated Fund of India. Moreover, the Parliament could provide grants to the States for the welfare of Scheduled Tribes, and for enhancing the administration in the Scheduled Areas. And the amount of such grants are determined on the recommendation of the Finance Commission.
Discretionary Grants (Article 282)
Under Article 282, both the Centre and the States have the power to provide grants for any public purpose. Through this Article, the Centre makes grants to the States.
These grants are called discretionary grants mainly because the Centre has no obligation to give these grants and it lies at the discretion of the Centre.
Provisions for the protection of State’s interests
As we all know that the Indian governing system is unitary in spirit. So, the Centre has comparatively more powers in regard to financial relations between Centre and State. So, there should be provisions to protect the interest of the states in financial matters. So, to protect the interest of the States, the Constitution states that certain bills can be introduced in Parliament only on the recommendations of the President. These bills are-
- A bill that imposes or varies any tax or duty in which states are interested.
- A bill that varies the meaning of the expression ‘agricultural income’ as defined for the purposes of the enactments relating to Indian income tax.
- A bill that imposes any surcharge on any specified tax or duty for the purpose of the Centre.
- A bill that affects the principles on which moneys are or may be distributable to states.
Borrowings by the Centre and States
The Constitutional provisions for the borrowings powers and limits of the Centre and State are-
- The Central Government can borrow within India or from outside India, upon the security of the Consolidated Fund of India. But this has to be done within the limits fixed by the Parliament of India.
- The Central Government can also give guarantees upon the security of the Consolidated Fund of India. But again, this has to be done within the limits fixed by the Indian Parliament.
- Any State Government can borrow within India, and give guarantees, upon the security of the Consolidated Fund of the State. But this should be done within the limits fixed by the Legislative Assembly of the particular State.
- A State Government cannot borrow from abroad.
- The Central Government has the power to provide loans to any of the States, or give guarantees in respect of loans raised by the State. And the money required for such loans would be charged on the Consolidated Fund of India.
- A State cannot raise any loan without the permission of the Central Government if there is outstanding any part of the loan which has been provided to the State by the Centre.
Tax Immunities between the Centre and State
The inter-governmental tax immunities between the Centre and the States is also a distinctive feature of the financial relations between Centre and State. The tax immunities provided in the Constitution, also called ‘immunity from mutual taxation’ are-
The property of the Central Government is exempted from any sort of taxation imposed by the State or any authority within the State. Property of the Central Government includes- lands, shares, debts, buildings, chattels, everything that has a money value and every kind of property- movable, immovable, tangible and non-tangible. Property that is used for sovereign such as armed forces.
State Property or income
The Constitution provides for the exemption of state property or income from Central taxation. The income may be derived from the sovereign functions or commercial functions. But the Centre can tax the commercial functions of the State, by the consent of the Parliament.
So, these are some of the major points in the financial relations between Centre and State.
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