#1 India’s Unique Federal Structure and Its Implications

Federalism in India is a distinctive model of governance where powers are shared between a central authority (the Union Government) and regional entities (the State Governments). While India is often characterized as having a “quasi-federal” system, this reflects the centralizing tendencies that shape its federal structure, which is more unitary in practice than in theory. The Indian federal system, therefore, represents a blend of federal and unitary features.

Key Principles: India’s Unique Federal Structure

1. Division of Powers:

a. Union List: Encompasses subjects exclusively under the Union’s domain, such as defense, foreign affairs, and communications.

b. State List: Pertains to matters on which states can legislate independently, including police, public health, and agriculture.

c. Concurrent List: Covers subjects on which both the Union and State Governments can legislate, such as education, criminal law, and marriage and divorce.

d. Single Constitution: India operates under a single constitution for both the Union and States (Article 1), distinguishing it from other federations, such as the USA, where states have their own constitutions.

2. Centralized Features:

a. Strong Central Government: The Union Government possesses considerable powers, especially through provisions like Article 356, which allows the central government to intervene in state governance during times of crisis (President’s Rule).

b. Emergency Provisions: Articles 352, 356, and 360 provide for National, State, and Financial Emergencies, respectively, which further centralize authority in exceptional circumstances.

c. Residuary Powers: Under Article 248, the Union Parliament is empowered to legislate on matters not explicitly mentioned in the Union, State, or Concurrent Lists, further emphasizing the Union’s power.

d. Independent Judiciary: The Supreme Court of India ensures the protection of the Constitution and maintains the equilibrium of power between the Union and States by serving as the final arbiter on disputes.

e. Financial Relations: The Finance Commission (Article 280) advises on the distribution of taxes between the Union and States. Additionally, the Union provides grants to states for various needs, thus reinforcing the fiscal relationship between the two entities.

Key Constitutional Articles Relevant to Federalism:

Article 1: Defines India as a Union of States.

Article 245: Outlines the legislative powers of the Union and States.

Article 256: States’ obligation to comply with Union laws.

Article 356: President’s Rule, allowing central intervention in states.

Article 368: Prescribes the process of constitutional amendments affecting federal relations.

State-wise Taxation on Alcohol in India: A Federal Perspective

Alcohol taxation in India is largely a state subject, which allows states significant autonomy in regulating alcohol-related taxation, pricing, and control. The state’s role in alcohol taxation and regulation provides a strong example of India’s federal structure in practice.

Key Aspects of Alcohol Taxation in India:

1. Excise Duty: Levied by state governments, the excise duty on alcohol varies across states, often higher in states with monopolistic control over liquor sales (e.g., Kerala, Andhra Pradesh).

2. VAT (Value Added Tax): States apply VAT to alcoholic beverages, and the rate of VAT varies, with some states setting high rates to generate substantial revenue.

3. Retail Price Regulation: States determine the retail price of alcohol, influenced by excise duties and taxes. Some states also set Minimum Retail Prices (MRP) for alcohol.

4. Monopolistic Control: States like Kerala and Tamil Nadu have established state-run monopolies on alcohol sales (e.g., Kerala State Beverages Corporation). Such states often impose higher taxes on alcohol.

5. Prohibition and Alcohol Bans: Certain states, such as Gujarat and Bihar, have implemented alcohol bans or prohibitions, although illegal trade may persist.

Examples of State-wise Taxation:

Kerala: The Kerala State Beverages Corporation manages alcohol sales, imposing high taxes on liquor.

Tamil Nadu: Tamil Nadu State Marketing Corporation (TASMAC) runs alcohol retail stores with significant excise duties.

Madhya Pradesh: The state imposes high taxes on alcohol, with rates differing based on the type of alcohol.

The revenues generated from alcohol-related taxes are critical for many states, funding vital infrastructure and social welfare programs.

Supreme Court’s Judgment on Taxation of Industrial Alcohol: Impact on Federalism

A nine-judge bench of the Supreme Court made a pivotal ruling on the taxation of industrial alcohol, significantly influencing both the fiscal powers of states and the nature of federal relations in India. The ruling is part of an evolving narrative regarding the powers of the states and the Union, especially in areas where jurisdictional overlaps exist.

Taxation of Industrial Alcohol: Constitutional Complexity

The debate surrounding the taxation of industrial alcohol arises due to the overlap of constitutional authorities, as defined in the Seventh Schedule. Industrial alcohol, unlike beverage alcohol, is primarily used for industrial purposes but can be misused for intoxicating purposes, which places it within the ambit of state regulation.

State List (Entry 8): States have exclusive control over intoxicating liquors.
Union List (Entry 52): The Union regulates industries vital to the national economy.
Concurrent List (Entry 33): Both the Centre and States can legislate on industries of national importance.

The Centre had claimed jurisdiction over industrial alcohol, citing its broader economic importance, under the Industries (Development and Regulation) Act of 1951. However, the Supreme Court, in its majority opinion, ruled that states have the authority to tax and regulate both beverage alcohol and industrial alcohol, due to the potential health risks associated with the latter.

Impact on State Power:

This judgment marks a significant shift in the federal balance, reinforcing state powers. The ruling overturns the earlier 1990 judgment in Synthetics & Chemicals Ltd. vs State of Uttar Pradesh, which had barred states from taxing industrial alcohol.

Fiscal Implications for States:

The Supreme Court’s decision grants states greater fiscal autonomy, especially concerning industries and substances that can be sources of revenue. For instance, Karnataka’s decision to increase excise duties on locally produced liquor by 20% in 2023 highlights the direct financial impact of such judgments.

The Broader Implication on Federalism:

The judgment reaffirms the differentiated distribution of power in India’s federal system. The statecentric approach in taxation reflects the role of the states as key players in regulating local industries and resources. Furthermore, the Court’s stance is consistent with its previous rulings that reinforce state powers, such as the July 2024 judgment that upheld the right of states to collect royalties from mineral extraction. This decision also contributes to the ongoing discourse on the equilibrium of central and state powers, reinforcing the federal ethos in India’s constitutional framework.