Introduction
Prior to the formation of the Indian federation, states were not sovereign entities, and hence no specific financial safeguards were required. Over time, financial relations have evolved significantly, especially with the 101st Constitutional Amendment and the introduction of Goods and Services Tax (GST). Articles 268 to 280 lay the foundation for the financial relations between the Centre and States.
Division of Taxation Powers
Union List Taxes:
Parliament has exclusive authority to levy taxes listed in the Union List.
State List Taxes:
State Legislatures have sole authority over taxes specified in the State List.
Concurrent Taxation (GST Exception):
The Concurrent List does not usually include taxes. However, the 101st Amendment introduced a shared legislative authority over GST between Parliament and State Legislatures.
Residuary Taxation Powers:
Parliament has the exclusive power to impose taxes not mentioned in any of the three lists, such as wealth tax and expenditure tax.
Also Read: Legislative relations between centre and state
Constitutional Restrictions on State Taxation
States cannot tax goods or services:
- Supplied outside the state.
- Exported or imported.
- Electricity taxes cannot be levied on electricity consumed or sold to the Union or used for railway operations.
- Taxation on interstate river water usage requires Presidential approval.
Distribution of Tax Revenues
Duties Levied by Centre, Collected by States (Article 268):
- Stamp duties on financial instruments.
- Proceeds are retained by the respective states.
Taxes Levied and Distributed by the Centre (Article 269):
- Tariffs on interstate trade.
- Proceeds are allocated to the states based on Parliament’s recommendations.
GST on Interstate Trade (Article 269-A):
- Collected by the Centre but shared between the Centre and States as per GST Council recommendations.
Union Taxes Shared with States (Article 270):
Includes Union List taxes except those covered under Articles 268, 269, and 271.
Surcharges (Article 271):
Parliament may impose surcharges on taxes, with proceeds retained by the Centre. GST is exempt from this provision.
Grants-in-Aid to States
- Statutory Grants (Article 275):
- Provided to states requiring financial assistance.
- Includes special grants for tribal welfare and administration of scheduled areas.
- Discretionary Grants (Article 282):
- Allocated for public purposes outside legislative competence.
Finance Commission
The Finance Commission plays a critical role in recommending the distribution of tax revenues and grants between the Centre and States. It ensures dynamic and equitable fiscal relations.
Impact of Financial Emergency
In case of a financial emergency under Article 280, the Centre assumes greater control over state finances, mandating strict adherence to fiscal propriety.
Conclusion
India’s financial relationship between the Centre and States reflects a fine balance between autonomy and central oversight. With reforms like GST and Finance Commission recommendations, the system adapts to changing economic and administrative needs. However, challenges like inequitable borrowing powers and financial emergencies highlight areas needing further attention.
FAQs
What are the key constitutional provisions governing financial relations between the Union and States in India?
Articles 268 to 293 in Part XII of the Indian Constitution govern financial relations. These include taxation powers, revenue distribution, grants-in-aid, and borrowing limits.
How are Goods and Services Tax (GST) revenues shared between the Centre and States?
GST revenues are collected by the Centre on interstate trade and are distributed between the Centre and States based on the recommendations of the GST Council.
What role does the Finance Commission play in Centre-State financial relations?
The Finance Commission recommends the distribution of tax revenues between the Centre and States, provides guidelines for grants-in-aid, and ensures fiscal equity across states.
Reference: unacademy