Financial Relations Between Centre and states

Indian government follows a quasi-federal system wherein the financial, legislative and administrative powers are divided between the centre and state. However, the centre has more control leading to great decision-making power. The financial relations between centre and state are such that the latter is often dependent on the former. As the constitution has not made any specific distinctions, the country’s financial resources are mostly under the control of the centre.

The state governments often have to do with scant resources due to which they often have to ask the centre for grants and subsidies.

The Indian Constitution has elaborate provisions regarding the distribution of revenues between the Union and the States.
Article 268 to 293 in Part XII deal with the financial relations. The financial relations between the Union and the States can be studied under the following heads.

Constitutional Provisions Regarding The Financial Relationship Between The Center And The States:

Article 268

Article 268 deals with the imposition of stamp duty by the Union, but its collection and allocation fall under the jurisdiction of the States.
These taxes are excluded from contributing to the Indian Consolidation Fund, as they are neither included in it nor centralized; instead, they are disbursed by the respective State where they are collected.
The tax on services was initially brought under the purview of this article through the 88th Constitutional Amendment. However, following the introduction of the Goods and Services Tax (GST) and the subsequent 101st Constitutional Amendment, this provision was once again removed.

Article 269

Here is the information presented in point format for clarity:

The tax levied under Article 269 applies to all interstate transactions involving the purchase, sale, and transportation of goods, except for those specifically exempted in Section 269A and newspaper sales.
The responsibility for collecting this tax lies with the federal government, while the distribution of the tax revenue is the prerogative of state governments. Notably, the tax collected in accordance with this provision does not get consolidated into India’s Consolidated Fund.

Article 269 A

The 101st Constitutional Amendment introduced a novel provision, Clause 269A, which brought forth a range of significant changes.
Article 269A(1) predominantly addresses the following key aspects:

Taxation and the collection of Goods and Services Tax (GST) concerning goods and services, particularly in the context of cross-border trade and commerce.
The proceeds collected are to be divided between the states and the Union.
Parliament has the authority to enact laws governing the allocation of taxes imposed under this article, guided by the recommendations of the GST Council.
The responsibility for levying and collecting GST on goods and services used in interstate trade or commerce rests with the Central Government. Nevertheless, the distribution of this tax between the Center and the States is determined in accordance with parliamentary provisions and the recommendations of the GST Council.
The criteria governing the location and timing of providing goods or services, or both, during interstate trade or commerce are also subject to standards established by Parliament.

Article 270

While the Center is responsible for the imposition and collection of taxes, the states and the Center jointly shoulder this fiscal responsibility, as outlined in Article 270.
This category encompasses all taxes and levies enumerated in the Union List, with the following exceptions:
a. The duties and taxes specified in Articles 268, 269, and 269 A.
b. Tax and duty surcharges detailed in Article 271.
c. Any fees collected for specific purposes.
d. Subclauses 270 (1A) and 270 (1B) were introduced as amendments by the 101st Amendment. After the implementation of the GST, the division of taxation between the central and state governments underwent significant changes.

Article 271

Parliament retains the authority to introduce new fees at any time to increase tax revenue, apart from the goods and services tax specified in section 246A.
All surcharge revenue will be allocated to the Consolidated Fund of India, with taxes withheld by Parliament instead of being distributed among the states.

Allocation of taxing powers between centre and state

Parliament can levy taxes on subjects listed in the union list (13 in number).
The state legislature has the power to levy tax on subjects listed in the state list (18 In number).
After the 101st amendment act of 2016, Parliament and state legislature can make laws governing goods and services tax.
Residuary power of taxation is vested in Parliament (gift tax, wealth tax and expenditure tax).
Restrictions on taxing powers of the state.
The state legislature can impose taxes on professions, trades, and employment but at most 2500 per annum.
The state legislature is prohibited from imposing the tax on the supply of goods or services when the supply takes place outside the state OR when the supply occurs in the course of import or export.
The state legislature can impose a tax on the consumption or sale of electricity, but it cannot impose on the consumption or sale of electricity consumed by the centre or sold to the centre or consumed in the maintenance of railways.
The state legislature can impose any water tax, but that water should not be distributed or sold by any authority established by Parliament.

The financial relations between centre and state are such that the latter is often dependent on the former. As the constitution has not made any specific distinctions

Distribution of Tax Revenues

80th Amendment Act of 2000, enacted to give effect to the recommendation of the tenth finance commission (out of total income obtained from certain Central taxes and duties, 29% should go to the state).
The 101st amendment has introduced a new tax regime ( goods and services tax GST).
Taxes levied by the Centre but collected and appropriated by the states:
- Bill of exchange, cheque, promissory note, insurance policies, shares, etc.
Taxes levied and collected by Centre but assigned to the states:
- Sale or purchase of goods in the course of inter state trade consignment of goods in the course of interstate trade.
- Levy and collection of goods and services tax during interstate trade.

The financial relations between centre and state are such that the latter is often dependent on the former.

Distribution of Non Tax Revenues

Article 268 Duties levied by the Union but collected and appropriated by the States.
Article 269 Taxes levied and collected by the Union but assigned to the States.
Article 270 states that Taxes levied and distributed between the Union and the States
Parliament may enact the taxes and levies surcharges in Articles 269 and 270. The surcharge’s proceeds are only used for the centre.

Grant-in-aids to States

Statutory Grants
- Article 275 empowers the Parliament to offer grants to states which are in need of financial assistance, rather than to all states. Each year, these grants are charged to the Consolidated Fund of India (CFI).
- Aside from this standard provision, the Constitution additionally provides for special funds to promote the welfare of scheduled tribes (STs) in a state or to improve the quality of administration of scheduled territories in a state, such as Assam.
- Under Article 275 statutory grants (both general and particular) are awarded to states on the Finance Commission’s recommendation.
Discretionary Grants
- Article 282 empowers the Union and the states to give grants for any public purpose, even if it falls outside of their own legislative jurisdiction. The Centre is responsible for enforcing this regulation

Borrowing by Centre and States

The Central Government can borrow within the country or outside up to a certain limit fixed by the parliament.
The state government can borrow only within the country from the central government.

Conclusion

Taking into consideration various forms of government funding, GST and its impact, the roles of the Finance Commission and GST Council, and states’ borrowing authority, it’s evident that Indian states heavily rely on federal financial aid. This dependence highlights their limited economic autonomy compared to other federations worldwide.