1
Ankita Bhadouriya, “Financial Relations Between The centre And The States” assessed on 5 -3-16,
http://rostrumlegal.com/financial-relationship-between-the-centre-and-the-states-by-ankita-bhadouriya/
Consolidated fund of India and the states
Clause (1) of Article 266 provides for the consolidated fund of India and consolidated fund of the
states.
The consolidated fund of India is formed of the following:
-all revenues received by the government of India
-all moneys raised by government of India by issue of treasury bills, loans or ways and means
advances;
-all moneys received by government of India in repayment of loans.
Clause (3) of Article 266 lays down that no moneys out of the consolidated fund of the India or
the state shall be appropriated except in accordance with the law and for the purposes and in the
manner provided in the constitution.
The constitution divides the taxing powers between the Centre and the states. The
taxes enumerated in the union list are leviable by the Centre and those included in the state list
are leviable by the state exclusively.
Taxation is treated as a distinct matter for the purposes of legislative competence vis-a-vis the
general entries. Power to impose tax ordinarily would not be deduced from a general entry as
an ancillary power. However theresiduarytaxing power is veted in the union by the 97 th entry
of the Union list.
Clause 3 of this article states that the power of the legislature of a state to make laws
under clause 1 shall not be construed as limiting the power of the parliament to make laws
with respect to taxes on income accruing from or arising out of professions trades, callings,
and employments.
(v) Taxes on the sale or purchase of goods in the course of inter-state trade and
commerce specified under sub clauses b,c,or d,of clause (29-A) of Article 366
(Article286(3)(b))
(vi) The constitution (Forty sixth Amendment) Act,1982,has amended Clause (3) of
Article 286 to the effect that State Sales Tax laws in respect to sales tax mentioned
in the sub-clause (b),(c),(d) of clause (29-A) of Article 366have been subjected to
restrictions which may be imposed by Parliament by law.
Clause 29-A of Article inserted by the Constitution (Forty-sixth Amendment) Act, 1982 defines
that “tax on the sale or purchase of goods “ includes-
(a) A tax on the transfer of property in goods (whether as goods or in some other form)
involved in the execution of a works contract;
(b) A tax on the delivery of goods on the hire –purchase or any system of payment by
installments ;
(c) A tax on the transfer of the right to use any goods for any purpose (whether or not for a
specified period) for cash,deferred payment or other valuable consideration ;
And such transfer ,delivery shall be deemed to be sale of those goods by the person making
the transfer or the delivery and a purchase of those goods by the person to whom such
transfer or delivery is made.
The state laws imposing taxes on such sales or purchases (mentioned above) shall be subjected to
such restrictions and conditions as may be specified by parliament by law.
For the smooth working of the system of the double government set up by a federal
Constitution, it is necessary that there should be immunity of the property of one government from
taxation by the other. Such “mutual immunity from taxes saves a good deal of fruitless labour in
assessment and calculation and cross checking of taxes between the two goverments.
The Doctrine of Immunity of Instrumentalities was for the first time propounded by the Supreme
Court of the United States of America, in the well-known case of McCulloch v. Maryland. In this
case the U.S. Congress enacted a law incorporating a Bank and a State (Maryland) levied a tax on
the operations of the Bank, the American Supreme Court held the levy unconstitutional.
Article 285(1) debars the state from taxing a union property unless Parliament by law otherwise
provides. This article cannot be overridden by any executive order or a circle issued by any
authority, either at the centre or in the states.
Clause (2) of the same Article provides that the exemption from State Taxation would not be
available with respect to any property of the union on which tax was leviable immediately before
the commencement of the constitution , provided that such tax continue to be levied in that state.
However parliament may make a law withdrawing the exception contained in clause (2).
Article 289(1) lays down that the property and income of a state shall be exempt from Union
Taxation. However Clause (2) of this article provides that immunity from the union taxation shall
not apply to a trade or business carried on by or on the behalf of the Government of the State or
any property used or occupied for the purposes of such trade or business or any income accruing
or arising in connection therewith.
Clause (3) of Article 289 empowers the Parliament to declare any trade or business or any class
of trade or business to be incidental to the ordinary functions of Government. Such trade or
business shall be exempt from union taxation.
In New Delhi Municipal Corporation v. State of Punjab, the Supreme Court held that State
property exempted from tax under Article 289(1) meant such property as was used for the purpose
of Government and not for the purposes of trade or business. The Court observed that basic premise
of one sovereign not taxing another sovereign is vested in the Articles 285 and 289, but while
immunity in favour of Union of India under Article 285 is absolute, immunity in favour of state
under Article 289 is qualified one.
Article 265 declares that no tax shall be levied or collected except by authority of law. This article
embodies the English principal of “no taxation without representation” the term “law” here means
a statute law, or law made by the legislature.
There are few Articles in the Indian Constitution which specifically focuses on distribution of revenues.
They are:
Article 2682: Duties levied by the Union but collected and appropriated by the States:
This Article was amended by the Constitution (seventh amendment) Act, 1956 with effect from 1st
November 1956. Article 268 (1) provides that stamp duties and excise on medicinal and toilet preparation
which are mentioned in Union List, the collection of duties shall be made by the State which shall be levied
by the Union Government. The proceeds of any such duty leviable within any State in any financial year
shall not form part of the consolidated Fund of India but shall be assigned to that State.
Article 268-A3: Service tax levied by Union and collected an appropriated by the Union and
States:
This Article was inserted by ninety-fifth Amendment Bill, 2003 which was passed by both the Houses of
Parliament – Lok Sabha on 6-5-2003 and Rajya Sabha on 8-5-2003 . Article speaks that taxes on services
shall be levied by the Government of India which shall be collected by the States. Such tax shall be
appropriated by the Government of India and the States.
Article 269: Taxes levied and collected by the Union but assigned to the States:
This Article was lastly amended by the eightieth amendment with effect from 1st April, 1996. Taxes which
shall be levied and collected by the Government of India which are included in this Article: (a) the
2
Reference to Article 268 of the Indian Constituttion
3
Reference to Article268 A of the Indian Constitution
consignment of goods which takes place in the course of inter-state trade or commerce, (b) sale or purchase
of goods which takes place in the course of inter-state trade or commerce.4
Article 270: Taxes levied and distributed between Union and States:
This Article was lastly amended in eightieth amendment which was in effect from 1st April, 1996. This
Article specifically provides that taxes on income other than agricultural income and corporation tax shall
be levied and collected by the Union and is distributed by the Union and States . The revenue which shall
be transferred to the Sates is unconditional and the States shall be free to use their income as and when they
like. In spite of the large transfer, the fact remains that States are not happy and the main reason being that
due to political reasons, the States do not make adequate efforts to impose more tax. The tax proceeds shall
not form a part of consolidated fund of India but shall be distributed among States.5
4
Komal Dave, “Constitutional Law:Disrtibution of Revenues”, assessed on 09-03-2016,
http://www.legalserviceindia.com/article/l233-Distribution-Of-Revenues.html
5
ibid
of income tax with respect to Union territories as those territories are centrally administered through the
President.”
Article 271: Surcharge on certain duties and taxes for purposes of the Union:
This Article corresponds to S. 137 and S. 138(1) of the Government of India Act, 1935. Article basically
speaks that Parliament is empowered to levy a surcharge from time to time as it’s the parliament who has
imposed a surcharge and so it won’t be precluded to surcharge in another form. All proceeds from such
surcharges are to form part of the Consolidated Fund of India and are not liable to be distributed among the
states. No one can prevent Parliament to impose a surcharge.
Article: 272: Taxes which are levied and collected by the Union and may be distributed between
the Union and the States:
This Article has been omitted by the Constitution Act, in eightieth amendment.
Grant – In – Aid:
Article 273: Grants in lieu of export duty on jute and jute products:
Under the Government of India Act, the Central Governement shared the net proceeds of the jute
export duty with the jute growing provinces. Under this Constitution, the States are not entitled to
any such share.
The Provision specifies that for a period of 10 years from the commencement of the Constitution,
the jute growing states of West Bengal, Bihar, Orissa and Assam will receive grants-in-aid from
the Union in lieu of the above share of the jute export duty to the extent of sums specified by the
President with the consultation of Finance Commission
Article 282: Expenditure defrayable by the Union or a State out of its revenues:
This Article corresponds to (i) Section 150 of the Government of India Act, 1935; (ii) Article 1,
Section 8(1) of the Constitution of the United States, and (iii) Section 81 of the Commonwealth of
Australia Constitution Act, 1900. This Article provides that the spending power of the Union or
State Legislature is not limited to the legislative powers. Thus, they can spend more money but the
purpose should be “public”.6
Criticism: This Article has very wide wings. How this money is to be utilized, is not mentioned in
this article. So, any political party can misuse the money in name of “public purpose”.
6
ibid
CONCLUSION
The scheme of allocation of taxing powers of Union and States, though is created with many
considerations in view like economy, simplicity, convenience, uniformity, yet fails to create an
equilibrium between responsibilities and resources at the state level. However the most expansive
and lucrative sources of taxation lie with the Centre like the income-tax, corporation tax, customs
and excises. Centre has whole country to take care and can tax the taxing capacity anywhere in
India. Whereas on other hand, the fiscal needs of the states are large, because of their responsibility
to provide for development, welfare and social service activities like education, housing, health
etc.. for which there is insatiable demand in our country, their revenue raising capacity is restricted
due to many reasons like-
However, the framers of Constitution did not intend that all taxes assigned to the Centre should be
solely spent by the Centre for its own purposes. They desired that a part of the central revenue
arising from the taxation be used for subsidising the state activities. Till the year 2000, only a few
central taxes were shareable between centre and states but the Tenth Finance Commission
suggested and changed by the new scheme in which the states shared the total tax revenue of the
centre. This scheme is designed to enable the states to share the aggregate buoyancy of the central
taxes. Also, the Constitution of India provides for several types of grant-in-aid from the centre to
the states.7
7
Supra note 1