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Imperial Journal of Interdisciplinary Research (IJIR)

Vol-2, Issue-6, 2016


ISSN: 2454-1362, http://www.onlinejournal.in

Central State Financial Relation in India


Kanchan
Assistant Professor, SGGS Khalsa College, Mahilpur, India.

Abstract: The Financial Relationship between the union parliament exclusive power to levy taxes on
centre and the state is provided in the constitution. several items. The state, legislature enjoy similar
The constitution gives a detailed scheme of power with regard to other specified items. In
distribution of financial resources between union general the union parliament levies tax on items
and states. Like other powers financial powers are mentioned in the union list while the state
also distributed between the two sets of government. legislatures levy taxes on items mentioned in state
The sources income of the union government are list. The Constitution of India, being federal in
those mention in the union list and sum of these structure, divides all power(legislative ,executive
sources are income tax other the agricultural and financial) between the center and the states.
income., customs And excise duties . The state However, there is no division of judicial power as
government on the other hand, draws its main the constitution has established an integrated
income from the sources mentioned in union list judicial system to enforce both the central laws as
while the state legislatures levy tax on item's well as state law.
mentioned in state list.

KEYWORDS: legislative, administrative, financial


relations, tax, grants in aids.

INTRODUCTION

The distribution of powers in countries adopting the


LEGISLATIVE RELATIONS:
federal system of government defines the financial
 ARTICLES: A245 - A255
relations between the Central and State
 ASPECTS IN LEGISLATIVE
governments. However, there are some special
RELATIONS
problems that have to be solved within the federal
1. Territorial extent of central and state
financial system in determining the basis of division
legislation.
and the amount that should he divided between the
2. Distribution of legislative subjects.
Centre and the State. The financial Relation between
3. Parlimentary legislation in state field.
the central (union) and the state is provided in the
4. Centre`s control over state legislation.
constitutional. The constitution gives a detailed
scheme of distribution of financial resources
1.TERRITORIAL EXTENT OF CENTRAL
between union and states. The India constitution
AND STATE LEGISLATION:
makes a board distribution between the power to
 ARTICLE 245
levy a tax and the power to appropriate the proceeds
 Parliament: whole of the
of a tax. Thus, the legislature which levies a tax is
country[including sea border] (or)part of
not necessarily the authority which retains the
the territory+`Extra territorial legislation
proceeds of a tax levied. The constitution grants the

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-6, 2016
ISSN: 2454-1362, http://www.onlinejournal.in

‘to make laws applicable to the Indian 1. In case of conflict between the central law
citizens and their property in any part of the and the state law on a subject enumerated
world. in the concurrent list, the Central law
 State: within the border of state(except: prevails over the state law.
nexus in object between states). 2. Exception: If the state law has been
 Exceptions: reserved for the consideration of the
1. President: regulations relating peace president and has received his assent, the
and development in 4U.T`s the state law prevails in that
(A&&N,laksh,D&NH,D&D).modify laws state.(but::parliament can override it by
in tribal areas. making a law by subsequently making a
2. Governor: not to apply (or) modify law on the same matter).
parliamentary laws in scheduled and 3. PARLIMENTARY LEGISLATION IN THE
tribal areas STATE FIELD:
2. DISTRIBUTION OF LEGISLATIVE  ARTICLES 249,250,251,252,253.
SUBJECTS:  NATIONAL INTEREST (A249): Rajya
 ARTICLE 246,247,248,254,255. sabha must pass resolution (2/3rd
 SCHEDULE 7(A246~3 LISTS) majority)~force for 1year~can be renewed
List I: Union list~ original: 97 subjects, At any no of time ~ ceases 6 m0nths after
present: 100 subjects resolution ceases(with out renewing) ~
List II:State list~Original:66 subjects, At state can make law but union law prevails
present:61 subjects over it.
List III:Concurrent List~Original:47  NATIONAL EMERGENCY (A250):
subjects, At present:52 subjects Proclamation of national Emergency by
President of India ~ inoperative after
42ndAmendment: 5 subjects from state to ^months (emergency ceases). ~state can
concurrent list make law but Union law prevails over it.
1. Education  A251: The law made by parliament in state
2. Forests list (under A249 and A250),whether
3. Weights and measures passed before or after the law made by state
4. Protection of wild animals and birds legislature of the state, prevails over the
5. Administration of justice (all courts)~except law made by state legislature made under
supreme and high courts. the same subject.
 POWER OF PARLIAMENT (A247): To  WHEN STATES MAKE REQUEST
provide for establishment of additional (A252): When 2 or more states request
courts for better administration of parliament to make law in prescribed
parliamentary laws(Union list). subject(surrender of power of states to
 RESIDUARY POWER (A248):Subjects union). Other states can pass resolution to
not mentioned in any of the list in Seventh enact the law(same).
schedule- parliament has the power to Examples:
make law(includes new tax imposition). 1. Wild life act, 1972
 CONFLICT BETWEEN STATE AND 2. Transplantation of human organs, 1994.
UNION LAWS(A254): 3. Water (prevention and control of pollution)
act, 1974

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-6, 2016
ISSN: 2454-1362, http://www.onlinejournal.in

 INTERNATIONAL AGREEMENTS  A258: The president can entrust officers of


(A253): Parliament has the power to enact the states (with [agreement]or without
laws in state list for implementing [legislation under union list]the consent of
international treaties, agreements, state) certain functions of the Union, but
conventions.(to fulfill international the extra costs have to be met by the Union.
obligations).  A258A: Governor of the state may,
Examples: with[agreement] the consent of the central
1. TRIPS Government, entrust to that government any of the
2. Environment related acts executive functions of the state.(no legislative
3. Anti hijacking act, 1982 delegation possible for state).
4. UN Act, 1947  A260: Govt. of India can (by agreement)
5. Geneva convention, 1960. make law to territories outside India.
 President`s Rule (A356):Parliament  A261: Full faith and credit shall be given
empowered to make laws in state list. ~law throughout the territory of India to public
made is operative even after the ceasure of acts, records and judicial proceedings of
president`s rule ~ But can be revealed or the Union and of every state.
altered or re-enacted by state legislature. Financial relations:
4. CENTRE`S CONTROL OVER STATE  A268-A293 Part XII of the Constitution.
LEGISLATION:  The states are greatly dependent on the
 Governor can reserve certain types of Bills Center in this sphere as well. Though the
passed by state legislature for the constitution provides independent sources
consideration of President. (President of revenue to states (levy taxes on item
enjoys ABSOLUTE VETO over them). no’s 45-63of the state list), these are not
 Certain bills can be introduced in state adequate. Therefore, the states have to
legislature with previous permission from depend on the center for subsidies and
President (matters relating to freedom of contributions.
trade and commerce).
 FINANCIAL EMERGENCY (A360):
President can direct the states to reserve
(money, financial) bills for his
consideration.
ADMINISTRATIVE RELATIONS:
ARTICLES: 256-263
 A256: The states are expected to comply
with the laws of the parliament and not
impede the exercise of the executive
powers of the union. 1. DISTRIBUTION OF TAXES
 A257: Center can issue direction regarding  The 80th Amendment of 2000 was enacted
the construction and maintenance of to give effect to the recommendations of
Communications of national or military importance. the 10th Finance Commission. The
It can also give instructions to state for protection of commission recommended that out of
railways. Expenses incurred by the states on this central taxes and duties 29% should go to
account are reimbursed by the Union. the states. ~~ALTERNATIVE SCHEME

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-6, 2016
ISSN: 2454-1362, http://www.onlinejournal.in

OF DEVOLUTION. ----- came into effect Parliament can levy surcharges and duties as
RETROSPECTIVELY from apr1, 1996. mentions in A269 and A270.Goes fully to union.
 The 88th Amendment added new article F. TAXES LEVIED AND COLLECTED AND
268-A dealing with service tax. Also RETAINED BY THE STATES:
inserted new subject to union list Service Enumerated in state list ~ 20 in numbers.
tax (92-C).Levived by center but collected tolls,capitation,fees,sales tax,land revenue, excise
and appropriated by both union and state. duties, tax on agri income etc.

A. TAXES LEVIVED BY CENTER BUT 2.DISTRIBUTION OF NON-TAX REVENUE:


COLLECTED AND APPROPRIATED BY
STATE (A 268): CENTER: Posts, telegraph, banking, broadcasting,
The proceeds of these duties levied within any state railways, coinage currency, psu`s, escheat and lapse.
do not form part of the consolidated fund of India STATE: Irrigation, forests, fisheries, psu`s (state),
but are assigned to that state.(Stamp duties bills of escheat and lapse.
exchange,cheques,promissory notes, policies of
insurance, transfer of shares, Excise duties 3. GRANTS-IN-AID TO THE STATES:
containing alcohol and narcotics).
B. SERVICE TAX LEVIED BY THE
CENTRAL GOVERNMENT BUT
COLLECTED AND APPROPRIATED BY
CENTER AND STATES (A 268-A):
The principles of appropriation are formulated by
Parliament. STATUTORY GRANTS: (A 275)
C. TAXES LEVIED AND COLLECTED BY  A275~Parliament - financial assistance
THE CENTER BUT ASSIGNED TO THE to state.
STATES (A 269):  Charged from consolidated fund of India
Taxes on sale of purchase of goods in course of  Both general and special purpose.
inter-state trade and commerce. Taxes on the  On the recommendations of Finance
consignment of goods in the course of inter-state commission.
trade or commerce. Principles laid down by DISCRETIONARY GRANTS: (A 282)
Parliament.  On the advice of Planning commission(to
D. TAXES LEVIED AND COLLECTED BY help states fulfill plan targets, influence
THE CENTER BUT DISTRIBUTED state and effectuate the national plan).
BETWEEN THE CENTER AND THE STATE  Not necessary to give.
(A 270):  Both center and state can make grants for
All taxes in the union list except: Duties and taxes special purpose.
referred in A268,A268-A,A269,A271 and any cess  Largest part of the grant (C- S) hence P.C
levied for special purpose. Distribution is prescribed gained significance.
by President of India On the advice of Finance
commission.
E. SURCHARGE ON CERTAIN TAXES AND Besides the exclusive power of taxation of union
DUTIES FOR THE PURPOSE OF CENTER (A and states government there are other 3
271): categories of tax.

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-6, 2016
ISSN: 2454-1362, http://www.onlinejournal.in

1. Taxes levied by the union government but development and growth .


collected and appropriated by the state. Stamp duty 6.) Projects of national and regional importance.
on Bills of exchange, excise duties on medicinal and 7.) Equity allocation of funds.
toilet preparation fall in this category. 8.) Additional duties of exicse in liew of sales tax.
2. Secondly, certain duties are levied and collected 9.) Grants In liew of railway passengers fares tax.
by union but the net proceeds of such taxes are 10) Setting up electronic and other relation
distributed among the states. Each state gets that infrastructure in export conclave.
amount of the tax as is collected with in its territory. 11) Taxation of agriculture's income.
Succession duty,estate duty on property other then 12) Sharing of revenue from certain central taxes.
agricultural land ,taxes on railway fares and 13.) There shall be a state level export promotion
advertisements etc ,fall in this category. committee (SLEPC )is to a approve specific project
3. Thirdly, certain taxes are levied and collected by and service the implementation.
the union but proceeds and distributed between 14.) Identify the project in advance.
the central and states. Taxes on non-agriculture 15.) In exception cases, No few projects has a
income (article 270) and excise duties on its in the gestation period of more than 2year.
union list accept medicinal and toilet preparition,
fall in this category. In this scheme of resources DESCRIPTION
distribution, the central government in India, indeed
The Indian Constitution provides for the
in every federation more money then it needs. This
appointment of a Finance Commission every five
is because ,the central government is the
years to determine the criteria and amount of finance
government at a distance where the state
to be divided between the Centre and the States.
government are the government at hand to the
Transfer of resources takes places in the following
people. The most productive sources of revenue in
three ways: share in taxes and duties, grants and
every federation are with the central, while the
loans. However transfers through the Finance
more expensive head of expenditures are with the
Commission contribute only about one-third of the
state for the state government are directly
total transfers from the Centre to the States. The rest
responsible for the maintenance of law and order
are channeled through the Planning Commission
and are changed with the responsible of carrying on
and discretionary grants from the Centre to the
welfare activity such as education, healthcare etc.
States. This has led to arbitrary distribution with
State should be given more financial autonomy than
backward states suffering a disadvantage and has
is given now to make their political autonomy real.
led to an erosion of state autonomy. The revenue

OBJECTIVE raising capacity of the states is also restricted


because of the nature of the taxes assigned to them.
1.) Appropriate the proceeds of a tax. The scope of the Finance Commission should
2.) Equally financial resources should be divided therefore be enlarged to reduce the interference of
between the union and states government of the Centre in the financial management of the
federation units. States. In the context of raising revenues the
3.) Expert efforts by providing assistance of the state recommendation of the Tenth Finance Commission
government. to increase the role of industry, needs to be seriously
4.) Trends in combined (central and state)tax considered. India has a federal structure i:e there are
revenue. division of power between central and state. These
5.) Creating appropriate infrastructure for the divisions of power can be classified into following
types.

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-6, 2016
ISSN: 2454-1362, http://www.onlinejournal.in

1.) Legislation Power: - (enumerated in article 245 taxes on goods and passengers’ tax on goods for
to 255 in part xi of the constitution) The constitution inter-state trade etc.
of India very clearly distributed the legislature Art-269 says about taxes to be levied and collected
power between the central and state. Both the sets of by the Union but assigned to the states. It includes
government on frame laws independently in there duties in respect of succession to property other than
respective spheres. There are three list of power agricultural land, estate duty in respect of property
given in the constitution. other than agricultural land, terminal taxes on goods
(I).Union list: - There are 99 subjects. The law on all and passengers carried by rail, sea or air taxes on
these subjects can be framed by the federal railway fares and freights, taxes on the sale and
government i:a the parliament of India. purchase of newspapers and advertisements given
(II).State list: - There are 62 subject. These subject therein etc.Art-270 says about taxes to be levied and
can be legislated upon by the state, subject collected by the Union and distributed between the
mentioned in the lists are like a law and other police, Union and the states. It includes tax on income other
jale, public health, education, agriculture ,local-self than agricultural. Art 272 says about the taxes to be
government, hospital, justice, organization of levied and collected by the Union and which may be
judiciary, except supreme court and high court, and distributed between the Union and the States. It
unemployment etc. includes many items given in the Union List as
(III).Concurrent list :- There are 55 subject in the railways and post telegraph telephones, wireless,
concurrent list. The subject mentioned in the foreign exchange, foreign loans, customs and export
concurrent like are marriage, divorce, criminal law, duties etc.Art 275 says about the grant-in-aid given
newspaper, books and ,printing press etc. by the Union to the states for implementing its
planning programmers as well as for the
2.)Administrative Relation :- (enumerated in article development of the Scheduled Castes, Scheduled
268 to 293 in part XII of the constitution ) Tribes and other weaker sections of the community.
These constitution provides for concurrent It is provided that the President shall determine
administrative jurisdiction to the union and states special grants to some states like Assam, Bihar,
over the subject of the Concurrent list. When we Orissa and West Bengal in lieu of export duty on jute
analyse these provision we find that in the sphere of and jute products etc. India become a independent
administrational relation also the unoin enjoy a country from British Colombia rules in August
superior portion vis-a-vis state. 15.,1947.There are several federation provides us
- Appointed governors. legislature, administration and financial powers to
- Protection of central property in a india. constitution .
- Power to appoint inquiry commission against chief
minister. New institutional mechanisms set up

3.) Financial Power :-( enumerated in article 268 to Central and state federation has many divisions of
293 in part XII of the constitution )Financial powers like legislation, Adiministrativ. and financial
Relation power between the Centre and States in powers. These powers are contitution specific
India.Art-268 says about duties to be levied by the article and laws. These are certain impact on
Union but collected and appropriated by the states. economy like:- Legislation power :- Only legislation
It includes duties on medicinal and toilet parliament is empowered to make laws on the
preparations, excise on tobacco, corporation tax, subject given in the union list,state list,and
customs and import duties, estate duty, terminal concurrent list . In this case disagreement the

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-6, 2016
ISSN: 2454-1362, http://www.onlinejournal.in

legislature passed by any government parliament last year, the focus was on rural development,
shall prevail over the law passed by the legislation infrastructure, tourism, mining, and internal security.
government list..The Constitution of India, under Besides the Zonal Councils, there are a number of
Article 263, envisaged the creation of institutional inter-state consultative bodies that review policies
mechanisms for investigating, discussing, and on specific issues: e.g., the National Water Resource
advising on specific issues of concern to the centre Council, the Advisory Council on Food grains
and the states. One of the most important of these Management and Public Distribution and the
institutions, the National Development Council Mineral Advisory Board. In addition, institutions
(NDC), was set up in 1952 with the Prime Minister have been set up under Article 263 to provide data
as chair and the chief ministers of all the states as for policies on specific issues. There are at present
members. The NDC was supposed to strengthen and separate Central Councils of Health, Local Self
mobilize efforts in support of the five-year plans. Its Government, Family Welfare, Transport
role was subsequently expanded in 1967, when, Development, Sales Tax and Sales Excise Duties,
following the recommendations of the and Research in Traditional Medicine. Also, from
Administrative Reforms Commission, it became a time to time, the government sets up a finance
consultative body involved in the preparation of the commission to re- commend the distribution of
plans and conducting their mid-term reviews. In resources from the centre to the states. There exists,
1990, there emerged another important institutional as well, a provision for the creation of tribunals to
mechanism – the Inter-State Council (ISC), with the settle disputes between states on the sharing of river
prime minister as chair, chief ministers of all the water.
states, six ministers of cabinet rank appointed by the CONCLUSION
PM as members, and another four ministers of The Indian Constitution recognizes that due to
cabinet rank as permanent invitees. While the NDC changing needs and circumstances it might become
involved the states in determining planning necessary to change the criteria and amount of
priorities, the ISC was expected to facilitate a more vision between the two levels of government
comprehensive dialogue. In recent times, the ISC (Centre and State) from time to time. Hence it did
has prepared an action plan on good governance and not lay down any hard and fast rules in this
scrutinized the implementation of the Sarkaria regard.Each government i:e central and state
Commission’s recommendations on centre-state enjoying powers assigned than. Equally financial
relations. Over the years, several other institutions relation between union and state government. There
have been set up to enhance co-operation between should be a co-ordinates efforts by the both
the centre and the states. While most of these are government central and state. The financial
advisory bodies, in the changing political scene they relation between both the given in constitution.
have been able to play a positive role. Zonal There should be a complete sepration between
Councils were established under the States central and state government powers. And the funds
Reorganization Act of 1956. With the Home should be transferred from to state for a proper
Minister as chair and the chief ministers of states in function of then.Central and state government has
the region as members, these councils meet to equally empowered rules regulation and laws.
resolve differences between the states and with the
centre and to promote balanced socio-economic REFERENCE
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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-6, 2016
ISSN: 2454-1362, http://www.onlinejournal.in

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Kanchan
Assistant Professor in Economics
Department
S.G.G.S Khalsa College Mahilpur.
Punjab.

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