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Financial Center-State Relations

Financial Center-State Relations

Introduction

  • Articles 268 to 293 in Part XII of the Constitution deal with Centre State financial relations. Besides these, there are other provisions dealing with the same subject.

Allocation of Taxing Powers

The Constitution divides the taxing powers between the Centre and the states in the following way:

  • The Parliament has exclusive power to levy taxes on subjects enumerated in the Union List (which are 13 in number).
  • The state legislature has exclusive power to levy taxes on subjects enumerated in the State List (which are 18 in number).
  • There are no tax entries in the Concurrent List. In other words, the concurrent jurisdiction is not available with respect to tax legislation. But, the 101st Amendment Act of 2016 has made an exception by making a special provision with respect to goods and services tax. This Amendment has conferred concurrent power upon Parliament and State Legislatures to make laws governing goods and services tax.
  • The residuary power of taxation (that is, the power to impose taxes not enumerated in any of the three lists) is vested in the Parliament. Under this provision, the Parliament has imposed gift tax, wealth tax and expenditure tax.

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. For example, the income-tax is levied and collected by the Centre but its proceeds are distributed between the Centre and the states.

Restrictions On The Taxing Powers Of The States

  • 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 is prohibited from imposing a tax on the supply of goods or services or both in the following two cases : (a) where such supply takes place outside the state; and (b) where such supply takes place in the course of import or export.
  • Further, the Parliament is empowered to formulate the principles for determining when a supply of goods or services or both takes place outside the state, or in the course of import or export.
  • 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.                                          Financial Center-State Relations
  • 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. But, such a law, to be effective, restrictions on the well as Entry 92-C in the Union List, both were dealing with service tax. They were added earlier by the 88th Amendment Act of 2003. The service tax was levied by the Centre but collected and appropriated by both the Centre and the States.

Distribution of Non-tax Revenues

  • The Centre
    • The receipts from the following form the 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; and (viii) others.
  • The States
    • The receipts from the following form the 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 the States

  • Besides sharing of taxes between the Centre and the states, the Constitution provides for grants-in-aid to the states from the Central resources.
  • There are two types of grants-in-aid, viz, statutory grants and discretionary grants:

Statutory Grants

  • Article 275 empowers the Parliament to make grants to the states which are in need of financial assistance and not to every state. Also, different sums may be fixed for different states. These sums are charged on the Consolidated Fund of India every year.
  • Apart from this general provision, 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.                            Financial Center-State Relations
  • The statutory grants under Article 275 (both general and specific) are given to the states on the recommendation of the Finance Commission.

Discretionary Grants

  • Article 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. Under this provision, the Centre makes grants to the states.                                              Financial Center-State Relations
  • “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 have a two-fold purpose: 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.”

Other Grants

  • The Constitution also provided for a third type of grants-in-aid, but for a temporary period. Thus, 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 States’ Interest

  • 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.
  • The expression “tax or duty in which states are interested” means:
  • a tax or duty the whole or part of the net proceeds whereof are assigned to any state; or (b) a tax or duty by reference to the net proceeds whereof sums are for the time being payable, out of the Consolidated Fund of India to any state.                                            Financial Center-State Relations
  • The phrase ‘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.

Borrowing by the Centre and the States

The Constitution makes the following provisions with regard to the borrowing powers of the Centre and the states:

  • The Central government can borrow either within India or outside upon the security of the Consolidated Fund of India or can give guarantees, but both within the limits fixed by the Parliament. So far, no such law has been enacted by the Parliament.
  • Similarly, a state government can borrow within India (and not abroad) upon the security of the Consolidated Fund of the State or can give guarantees, but both within the limits fixed by the legislature of that state.
  • 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.                                                                    Financial Center-State Relations
  • 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.

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