In this article, we will discuss Centre State Relations (Part-7). So, let’s get started.
Financial Relations (Part-1)
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. These together can be studied under the following heads:
Allocation of Taxing Powers
The Constitution divides the taxing powers between the Centre and the states in the follwing 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 101″ 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 enumer
ated 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.
Further, the Constitution has placed the following restrictions on the taxing powers of the states:
(i) 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.
(ii) 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.
(iii) 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.
(iv) 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 vallay. But, such a law, to be effective, should be raserved for the prasident’s consideration and receive his assent.
Distribution of Tax Revenues
The 80th Amendment Act of 2000 and the 101 Amendment Act of 2016 have introduced major changes in the scheme of the distribution of tax revenues between the centre and the states.
The 80th Amendment was enacted to give effect to the recommendations of the 10th Finance Commission. The Commission recommended that out of the total income obtained from certain central taxes and duties, 29% should go to the states. This is known as the Alternative Scheme of Devolution’ and came into ettect retrospectively from April 1, 1996. This amendment has brought several central taxes and duties like Corporation Tax and Customs Duties at par with Income Tax (taxes on income other than agricultural income) as far as their constitutionally mandated sharing with the states is concerned.
The 101st Amendment has paved the way for the imtroduction of a new tax regime (i.e.) goods and services tax- GST) in the country. 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 or goods or services or both. The GST replaced a number of indirect taxes levied by the Union and the State Governments and is intended to remove cascading effect of taxes and provide for a common national market for goods and services. The Amendment provided for Subsuming of various central indirect taxes and levies such as (i) Central Excise Duty,(ii) Additional Excise Duties, (iii) Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, (iv) Service Tax, (v) Additional Customs Duty commonly known as Countervailing Duty, (vi) Special Additional Duty of Customs, and (vii) Central Surcharges and Cesses so far as they related to the supply of goods and services. Similarly, the Amendment provided for subsuming of (i) State Value Added Tax/ Sales Tax (ii) Entertainment Tax (other than the tax levied by the local bodies). (iii) Central Sales Tax (levied by the Centre and collected by the States), (iv) Octroi and Entry Tax, (v) Purchase Thx, (vi) Luxury Tax, (vii) Taxes on lottery, betting and gambling, and (viii) State Surcharges and Cesses in so far as they related to the supply of goods and services. Further, the Amendment deleted Article 268-A as 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.
After the above two amendments (i.e., 80th Amendment and 101 st 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 (Article 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 (Article 269):
The following taxes fall under this category:
(i) Taxes on the sale or purchase of goods (other than newspapers) in the course of inter-state trade or commerce.
(ii) 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 state in accordance with the principles laid down by the Parliament.
C. Levy and Collection of Goods and Services Tax in Course of Inter-State Trade or Commerce (Article 269-A): The Goods and Services Tax (GST) on supplies in the course of inter-state trade or commerce are levied and collected by the Centre. But, this tax is divided between the Centre and the States in the manner provided by Parliament on the recommendations of the GST Council. Further, 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 (Article 270): This category includes all taxes and duties referred to in the Union List except the following:
(i) Duties and taxes referred to in Articles 268, 269 and 269-A (mentioned above);
(ii) Surcharge on taxes and duties referred to in Article 271 (mentioned below); and
(iii) 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 (Article 271): The Parliament can at any time levy the surcharges on taxes and duties referred to in Articles 269 and 270 (mentioned above). The proceeds of such surcharges go to the Centre exclusively. In other words, the states have no share in these surcharges.
However, the Goods and Services Tax (GST) is exempted from this surcharge. In other words, this surcharge can not 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 number. These are (i) land revenue; (ii) taxes on agricultural income; (iii) duties in respect of succession to agricultural land; (iv) estate duty in respect of agricultural land (v) taxes on lands and buildings; (vi) taxes on mineral rights; (vii) 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; (viii) taxes on the consumption or sale or electricity: (ix) taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-state trade or commerce or sale in the course of international trade or commerce or sale in the course of international trade or commerce of such goods; (x) taxes on goods and passengers carried by road or inland waterways; (xi) taxes on vehicles; (xii) taxes on animals and boats; (xiii) tolls; (xiv) taxes on professions, trades, callings and employments; (xv) capitation taxes; (xvi) taxes on entertainments and amusements to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or a District Council; (xvii) stamp duty on documents (except those specified in the Union List); and (xviii) fees on the matters enumerated in the State List (except court fees).
Distribution of Non-tax Revenues
A. 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.
B. 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
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.
A part from this general provision, the Constitution also provides for specific grants for promoting the welfare of the scheduled tribes in a state or tor raising the level of administration of the scheduled areas in a state including the State of Assam.
The statutory grants under Article 275 (both general and specific) are given to the states on the recommendation of the Finance Commission. (Contd)…