To prepare for INDIAN POLITY for any competitive exam, aspirants have to know about Centre-State Relations. It gives an idea of all the important topics for the IAS Exam and the polity syllabus (GS-II.). This is an essential portion of the polity. As IAS aspirants, you should be thorough with Centre-State Relations. In this article, you can read all about the Financial Relations.
|FINANCIAL RELATIONS (Art. 256-291)|
- Articles spanning from 268 to 293 in Part XII of the Constitution deal with Centre – state financial relations.
- All the levels of the government must have adequate finance at their disposal.
- If the legislative and administrative authority of the center and states has to be maintained then they must be financially autonomous.
- In Canada and Australia– central grants to states are must for the states to survive.
- Swiss Constitution makes center subservient to states.
- American Constitution wants financial independence between states and center but their also states rely on centre’s grant-in-aid.
- Indian constitution does not give a watertight division of financial resources but wants to secure equitable distribution.
|EVOLUTION OF FINANCIAL RELATIONS|
- In 1870 Lord Mayo introduced “devolution scheme” which for the first time initiated financial relations between GOI and government of constituent units.
- Income Tax was levied much before GOI Act, 1919 and was shared between central and provincial governments.
- GOI Act 1919 failed to do a rigid divisions between revenues of the governments but introduced revenue heads for governments (under dyarchy).
- Meston Award of 1920s said “administration and finance need not be with the same authority”
- GOI Act, 1935 recognized that certain taxes other than IT may also be collected by central government and shared with the provincial governments.
|EVOLUTION OF FINANCIAL RELATIONS|
- There should be resource-responsibility parity.
- Lower levels of federal units should be able to raise resources independently.
- Elasticity of expenditure and income.
- Equalization of transfer both horizontally and vertically between states
- Efficiency should be ensured in resource utilization.
|TAXATION ONLY BY AUTHORITY OF LAW (ART.265)|
- 265 – Taxes not to be imposed save by authority of law – “No tax shall be levied or collected except by authority of law”.
- No tax can be imposed by an executive order.
- The law providing for imposition of tax must be a valid law (Chotabhai vs. Union of India 1962).
- Example– A tax law would be void if it violates fundamental right to equality.
- Legislature can also impose tax twice on a thing. It is Double taxation (Avinder Singh vs. State of Punjab 1979).
|CONSOLIDATED FUND (ART.266)|
- 266– There will be Consolidated fund for India and Consolidated fund of State.
- Consolidated Fund of India is related to all revenues received by the government and expenses made by it, excluding the exceptional items.
- All revenues received by the government by way of direct taxes and indirect taxes, money borrowed and receipts from loans given by the government flow into the Consolidated Fund of India.
- All government expenditure is made from this fund, except exceptional items (which are met from the Contingency Fund or the Public Account)
- Importantly, no money can be withdrawn from this fund without the Parliament’s approval.
|CONTINGENCY FUND (ART.267)|
- 267(1) – Established Contingency Fund of India.
- It is in the nature of an imprest (money maintained for a specific purpose). Accordingly, Parliament enacted the Contingency fund of India Act 1950.
- The fund is held by the Finance Secretary (Department of Economic Affairs) on behalf of the PRESIDENT OF INDIA and it can be operated by executive action.
- The Contingency Fund of India exists for disasters and related unforeseen expenditures.
- Contingency Fund of each State Government is established under 267(2) of the Constitution .It is held by GOVERNOR and corpus varies from state to state (Legislature).
|SOURCES OF REVENUES|
|Union Govt.||State Govt.|
|Custom and excise duty||Grants under Art. 275|
|Income tax||Devolution on recommendations of Finance commission|
|Corporation tax||Provisions of CAG|
|Estate duty (except agriculture)||Toll tax, vehicle tax|
|Excise duty on tobacco and other intoxicants||Tax on minerals|
|Succession duty (except agriculture)||Entertainment tax|
|Inter-state trade tax||Housing taxes
|Art. 268||Duties levied by the Union but collected and appropriated by the states|
|Art. 269||Taxes levied and collected by the Union but assigned to the states|
|Art. 269A||Levy and collection of goods and services tax in course of inter-state trade or commerce|
|Art. 270||Taxes levied and distributed between the Union and the states|
|Art. 271||Surcharge on certain duties and taxes for purposes of the Union|
|Art. 274||Prior recommendation of President required to bills affecting taxation in which states are interested|
|Art. 275||Grants from the Union to certain states|
|Art. 279A||Goods and Services Tax Council|
|Art. 280||Finance commission|
|Art. 285||Exemption of property of the Union from state taxation|
|Art. 289||Exemption of property and income of a state from Union taxation|
|Art. 292||Borrowing by the Government of India|
|Art. 293||Borrowing by states
|ALLOCATION OF TAXING POWERS|
|Union List||-It contains 97 subjects of national importance such as defence, railways, currency, foreign affairs, post, among others.
-On this list, only parliament can make laws.
|State List||-It comprises of 66 subjects of local importance such as police, agriculture, health, among others.
-State legislature make laws on this subjects.
|Concurrent List||-It has 47 subjects of common concern to both centre and state govt. like marriage, social securities, etc.
-Both parliament and state legislature can make laws on this subjects.
-If conflict arises, then central legislation will prevail.
- Centre list – The Parliament has exclusive power to levy taxes on subjects enumerated in the Union List (which are 13 in number).
- State list – The state legislature has exclusive power to levy taxes on subjects enumerated in the State List (which are 18 in number).
- 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.
|The residuary power of is vested in the Parliament. Under this provision, the Parliament has imposed gift tax, wealth tax and expenditure tax.|
- But, the 101st Amendment Act of 2016 has made an exception by making a special provision with respect to GST. This Amendment has conferred concurrent power upon Parliament and State Legislatures to make laws governing GST.
- The Constitution 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.
|RESTRICTIONS ON THE TAXING POWERS OF THE STATE|
- A state legislature can impose taxes on professions, trades, callings and employments. But, the total amount of such taxes payable by any person should not exceed ₹2,500 per annum.
- A State Legislature can Impose Taxes On the Sale Or Purchase of goods (other than newspapers). But, this power of the states to impose sales tax is subjected to following restrictions –
- 287- A State Legislature can impose tax on the consumption or sale of electricity. But, no tax can be imposed on the consumption or Sale of Electricity which is (a) Consumed by the Centre or sold to the Centre; or (b) 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 the railway company for the same purpose.
- 288 – A State Legislature can impose a tax in respect of any water or electricity stored, generated, consumed, distributed or sold by any authority established by Parliament for regulating or developing any Inter- state River or River Valley. However, such a law, to be effective, should be reserved for the president‘s consideration and receive his assent.
|DISTRIBUTION OF TAX REVENUE|
- The 80th Amendment Act of 2000 and the 101st Amendment Act of 2016 have introduced major changes in the scheme of the distribution of tax revenues between the centre and the states.
- 80th Amendment – Enacted to give effect to the recommendations of the 10th Finance Commission. The Commission recommended ‘Alternative Scheme of Devolution’ which states that out of the total income obtained from certain central taxes and duties, 29% should go to the states.
- 101st Amendment – paved the way for the introduction of a new indirect tax regime – GST. Accordingly, the Amendment conferred concurrent taxing powers upon the Parliament and the State Legislatures to make laws for levying GST on every transaction of supply of goods or services or both. The Amendment provided for subsuming of various central indirect taxes and levies such as – Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, Central Surcharges and Cesses so far as they related to the supply of goods and services.
- Further, 101st Amendment removed Art. 268-A as well as Entry 92-C in the Union List, both were dealing with service tax (added earlier by the 88th Amendment Act of 2003).
- After the 80th and 101st Amendment, the present position with respect to the distribution of tax revenues between the centre and the states is as follows:
A. Taxes Levied by the Centre but Collected and Appropriated by the States (Art. 268):
- This category includes the stamp duties on bills of exchange, cheques, promissory notes, policies of insurance, transfer of shares and others.
- The proceeds of these duties levied within any state do not form a part of the Consolidated Fund of India, but are assigned to that state.
B. Taxes Levied and Collected by the Centre but Assigned to the States (Art 269):
- 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 net proceeds of these taxes do not form a part of the Consolidated Fund of India. They are assigned to the concerned states in accordance with the principles laid down by the Parliament.
C. Levy and Collection of GST in Course of Inter-State Trade or Commerce (Art 269A):
- The Goods and Services Tax (GST) on supplies in the course of inter-state trade or commerce are levied and collected by the Centre. However, this tax is divided between the Centre and the States in the manner provided by Parliament on the recommendations of the GST Council.
- The Parliament is also authorized to formulate the principles for determining the place of supply, and when a supply of goods or services or both takes place in the course of inter-state trade or commerce.
D. Taxes Levied and Collected by the Centre but Distributed between the Centre and the States (Art 270): This category includes all taxes and duties referred to in the Union List except the following:
- Duties and taxes referred to in Art. 268, 269 and 269-A;
- Surcharge on taxes and duties referred to in Art 271;
- Any cess levied for specific purposes.
- The manner of distribution of the net proceeds of these taxes and duties is prescribed by the President on the recommendation of the Finance Commission.
E. Surcharge on Certain Taxes and Duties for Purposes of the Centre (Art 271):
- The Parliament can at any time levy the surcharges on taxes and duties referred to in Art. 269 and 270.
- The proceeds of such surcharges go to the Centre exclusively (it should be noted that states have no share in these surcharges)
- However, GST is exempted from this surcharge (surcharge cannot be imposed on the GST)
F. Taxes Levied and Collected and Retained by the States:
- These are the taxes belonging to the states exclusively. They are enumerated in the state list and are 18 in total. Some important of these are:
- land revenue;
- taxes on agricultural income, succession and estate duties in respect of agricultural land;
- taxes on lands and buildings, on mineral rights, on animals and boats, on road vehicles, on luxuries, on entertainments, and on gambling;
- excise duties on alcoholic liquors for human consumption and narcotics;
- Taxes on the Entry Of Goods into a Local Area, on Advertisements (except newspapers), on consumption or sale Of Electricity, and on goods and passengers carried by road or on Inland Waterways;
- Taxes On Professions, trades, callings and employments not exceeding Rs. 2,500 per annum;
- Capitation Taxes;
- Stamp Duty on Documents (except those specified in the Union List);
- Sales Tax (other than newspaper); and
- Fees on the matters enumerated in the state list (except court fees).
|DISTRIBUTION OF NON-TAX REVENUE|
|The Centre||The States|
|Posts and telegraphs||Irrigation|
|Broadcasting||State Public Sector Enterprises|
|Coinage and currency||Escheat and lapse|
|Central public sector enterprises||Others|
|Escheat and lapse|
|GRANTS IN AID|
The Constitution provides for grants-in-aid to the states from the Central resources. There are two types of grants-in-aid –
|Statutory grants||Discretionary grants|
|Art. 275 empowers the Parliament to make grants to the states which are in need of financial assistance and not to every state. These sums are charged on the Consolidated Fund of India every year.
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)
The statutory grants under Art. 275 are given to the states on the recommendation of the Finance Commission.
|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 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.
These grants are to help the state financially to fulfil 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.
|GST COUNCIL (ART. 279-A)|
- The effective and efficient administration of the GST requires a co-operation and co-ordination between the Centre and the States.
- The 101st Amendment Act of 2016 provided for the establishment of a GST Council for consultation process.
- 279-A empowered the President to constitute a GST Council (joint forum of the Centre and the States). It is required to make recommendations to the Centre and the States on the following matters:
- The taxes, cesses and surcharges levied by the Centre, the States and the local bodies that would get merged in GST.
- The goods and services that may be subjected to GST or exempted from GST.
- Model GST Laws, principles of levy, apportionment of GST levied on supplies in the course of inter-state trade or commerce and the principles that govern the place of supply.
- The threshold limit of turnover below which goods and services may be exempted from GST.
- The rates including floor rates with bands of GST.
- Any special rate or rates for a specified period to raise additional resources during any natural calamity or disaster.
|FINANCE COMMISSION (ART. 280)|
- 280 provides for a Finance Commission as a quasi-judicial body. It is constituted by the President every fifth year or even earlier.
- It is required to make recommendations to the President on the following matters:
- The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states, the respective shares of such proceeds.
- The principles which should govern the grants-in-aid to the states by the Centre (i.e., out of the Consolidated Fund of India).
- The measures needed to augment the Consolidated fund of a state to supplement the resources of the panchayats and the municipalities in the state on the basis of the recommendations made by the State Finance Commission.
- Any other matter referred to it by the President in the interests of sound finance.
- The Constitution envisages the Finance Commission as the “balancing wheel of fiscal federalism in India”.
|PROTECTION OF INTEREST OF THE STATES|
- To protect the interest of states in the financial matters, the Constitution lays down that the following bills can be introduced in the Parliament only on the recommendation of the President:
- A bill which imposes or varies any tax or duty in which states are interested;
- A bill which varies the meaning of the expression “agricultural income” as defined for the purposes of the enactments relating to Indian income tax;
- A bill which affects the principles on which moneys are or may be distributable to states; and
- A bill which imposes any surcharge on any specified tax or duty for the purpose of the Centre.
|BORROWINGS BY THE CENTRE AND STATE|
Net proceeds means the proceeds of a tax or a duty minus the cost of collection. The net proceeds of a tax or a duty in any area is to be ascertained and certified by the Comptroller and Auditor-General of India. His certificate is final.
- The Constitution makes the following provisions with regard to the borrowing powers of the Centre and the states:
- The Central government can borrow (within the limits fixed by the Parliament) either within India or outside upon the security of the Consolidated Fund of India or can give guarantees. However, no such law has been enacted by the Parliament till date.
- The state government can borrow within India only (and not abroad) (within the limits fixed by the legislature of that state) upon the security of the Consolidated Fund of the State or can give guarantees.
- The Central government can make loans to any state or give guarantees in respect of loans raised by any state. Any sums required for the purpose of making such loans are to be charged on the Consolidated Fund of India.
- A state cannot raise any loan without the consent of the Centre, if there is still outstanding any part of a loan made to the state by the Centre or in respect of which a guarantee has been given by the Centre.
|INTER-GOVERNMENT TAX IMMUNITIES|
1.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.
- Property includes – lands, buildings, chattels, shares, debts, everything that has a money value, and movable or immovable and tangible or intangible.
- 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 entity) from state taxation or local taxation.
2.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.
- However, the Parliament can declare any particular trade or business as incidental to the ordinary functions of the government and it would then not be taxable.
- It should be noted that, the property and income of local authorities situated within a state are not exempted from the 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 EMERGENCIES|
1.National emergency (Art.352)
- The President can modify the constitutional distribution of revenues between the Centre and the states in operation of national emergency.
- The president 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.
2. Financial emergency (Art.360)
- In case of financial emergency, the Centre can give directions to the states: (i) to observe the specified canons of financial propriety; (ii) to reduce the salaries and allowances of all class of persons serving in the state; and (iii) to reserve all money bills and other financial bills for the consideration of the President.
|FACTORS RESPONSIBLE FOR POOR STATE FINANCES|
- Populist policies to win the elections
- Less elastic nature of state taxes
- Corruption in the tax administration state
- States have not tapped their fullest taxation potential – agriculture is out of taxation
- State level public sectors enterprises are more or less inefficient to accrue fiscal benefits
- Limited avenues of taxation available with the states
- In between 1986-1997, state governments accumulates high cost debts and recommendations of fifth pay commission came as final hammer on state finances
- Outbreak of COVID-19 pandemic drained financial resources of the states at unprecedented scale.
|PUNCHHI COMMISSION ON CENTRE-STATE FINANCIAL RELATIONS|
- All future central laws involving the state should provide for cost sharing as in RTE act.
- Do away with ceiling on profession tax under Art. 276
- Adopt a state specific approach towards fiscal consolidation as opposed uniform FRBM act.
- A part of state proceeds of spectrum should be shared with state for infrastructural projects.
- Synchronisation of an award of Union Finance Commission and State Finance Commission.
- Setting up Inter-State Commerce Commission under Art. 301.
- Existing central laws where the states are entrusted with implementation should be suitably modify to provide for cost sharing.