Centre-State Financial Relations [Concept]

In this article, we will discuss Centre-State Financial Relations in a simple and easy way and understand its various important aspects;

Since it is related to GST, so it is important to understand it well, so for better understanding, definitely read the article till the end. [GST Concept]

In a federal system country, there can be many types of relations between the center and the state, financial relationship is one of them. After going through this entire article, definitely solve the practice questions , this will test your understanding.

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Center-state relationship

| As we know that the Constitution of India is a federal system in itself. And the federal system is based on the principle of division of powers. Which means that all the powers conferred by the constitution such as legislative, executive and financial powers are divided between the center and the states. The center-state relationship is based on this.

Classification of Centre-State Relations

From the point of view of study, the relationship between center and state can be divided into three parts;

1. Center-state Legislative relations 
2. Center-state Administrative relations
3. Centre-State Financial Relations

We have covered the legislative relations between the center and the state and the administrative relations between the center and the state in the previous articles. If you have not read that article then read that article first so that things are very clear. In this article we will discuss about the Centre-State Financial Relations.

Center-State Financial Relations

Obviously, it is clear from the name of the financial relationship that it is related to money in some way. Basically the financial relationship is related to the sharing of taxes, imposition of taxes etc. between the center and the state.

As we know before 1st July 2017, there was some other system of taxes but after the implementation of GST there has been a vast improvement in the tax system. It has also affected the financial relations between the center and the state.

If you do not understand GST, then you can understand it by clicking here^, by this you will be able to understand Center-State Financial Relations better.

In the part 12 of the constitution, from Articles 264 to 293, the central and state financial relations have been discussed. However, this part includes up to Article 300A which deals with property, rights, liabilities and suits etc. We have all the important articles which may or may not be related to this part; Will discuss it.

Article 265 – Taxes not to be levied without authority of law

Any tax can be imposed only by authority of law and not otherwise. This means that the government cannot impose any tax on us without making any law.

What is meant by authority of law – it means valid law. That is, the proposal to levy the tax should be within the legislative competence of the legislature levying the tax.

Whenever a tax is imposed, it must be consistent with the conditions of Article 13. That is, any tax system should not violate the Fundamental Rights.

By and large, taxation is valid only if it is levied or collected as well as strictly authorized by law. Remember here also that if the goods on which tax is to be counted in the law, then the subordinate officer cannot add anything else to it.

Q. What if tax is levied in violation of Article 265?

Since this is not a Fundamental Right, therefore, on the basis of violation of Article 265, the Court can be moved under Article 32 only if the Fundamental Right has also been violated. After that, a writ like a mandamus can be sought.

List of tax subjects

In the Centre-State legislative relation, we have seen that Article 246 talks of three lists of legislative subjects, the Union List, the Concurrent List and the State List. Union List is discussed in Article 246(1), Concurrent List is discussed in Article 246(2) and State List is discussed in Article 246(3).

The Seventh Schedule has been prepared for all the subjects under these three lists. In which at present there are 97 subjects under Union List, 66 subjects under State List and 47 subjects under Concurrent List.

| These subjects also include those subjects on which Central and State Taxes can be levied.

️ Talking about the Union List, for this you can see the subject numbers 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 92A, 91B, 96 and 97 of the Union List.
️ Talking about the state list, for this you can see the subject numbers 46, 51, 53, 54, 55, 56, 60, 61 and 62 of the state list.
️ Similarly talking about the Concurrent List, for this you can see the subject numbers 43, 44 and 47 of the Concurrent List.

| The Center has the power to levy taxes on the subjects specified above in the Union List, the States on the subjects specified above in the State List and both the Center and the States on the subjects specified above in the Concurrent List.

The center has the right to levy tax on what was not mentioned in these three lists, as when the concept of service tax was introduced, the center had got the right to tax it. Because it was not written in any list.

Read Three Lists from Here – In Hindi^↗️– In English^↗️

Now as we know, things have changed completely after the introduction of GST. Many central and state indirect taxes were abolished and merged into GST. So let’s see what is the situation now. What has all changed with the advent of GST:

Note – Remember what has been mentioned here under the list of tax topics above, it will help in understanding the concept further.

Funds – Articles 266 and 267

Articles 266 and 267 are about Funds. Where the Consolidated Fund and Public Account have been talked about under Article 266, the Contingency Fund has been talked about under Article 267 . A separate article is available on this, you can read it by clicking here. Here, understand this much that – Consolidated Fund is that fund which is also called Treasury. Income from all major sources is kept in this fund. The money passed in the budget is withdrawn from this. Apart from this, salaries and allowances of government officials etc. are given from this. Public Accounts – Talking about, this is the fund where those funds are kept which are not the main source of income of the government. It is kept with the government as a security. For example, Employees Provident Fund – This is public money which is deposited in the public account with the government, it has to be returned when the time comes. Talking about Contingency Fund, it is meant for contingencies. In which 500 crores is deposited. It can be used by the executive whenever it wants, without asking the Parliament.

Distribution of revenues between the center and the states

Overall, the discussion of the financial relations between the Center and the state begins from here. It covers some very important articles; Let’s understand it.

Article 268 – Tax levied by the Center and collected and appropriated by the States

The central government initially levies it, but the tax covered under this article completely goes to the account of the state. The Center has no authority over this. That is, it is not counted in the Consolidated Fund of the Center.

In other words, the amount deposited by the state in any territory is not deposited in the Consolidated Fund of India in the following ways.

Stamp duty on transfer of bills of exchange, cheques, promise notes, policies, insurance and shares. as well as medicinal and cosmetic items, such as alcohol and narcotics; Excise duty on it.

There is also talk of bringing stamp duty under the ambit of GST. But potable alcohol i.e. liquor has been permanently excluded from the purview of GST. That is, forever and ever. why so?

Because it is one of the main sources of income of the state. how is that? Let’s understand it.

As soon as liquor is released from the factory, first of all excise duty is levied on it. Which is usually more than 25%.

After that, when it goes to be sold in the market, then VAT (Value Added Tax) is levied on it. Which is applied from 70 to 80 percent. And here the cascading effect is also seen. It happens that the cost of liquor made in 30 rupees sometimes goes up to 200 rupees.

Think for yourself how much the state will benefit from this. So why will liquor be brought under the purview of GST? Because if GST was implemented on it, then at most 28% tax could have been levied on it. Because at present this is the maximum limit of GST.

The same game is played in the case of petrol and diesel, that is why they are also out of the purview of GST.

Article 268 ‘A’ – Service tax

Service tax was implemented by the 88th Constitutional Amendment 2003. Like you are reading this article right now. This is one type of service which I am providing you.

Earlier this tax was collected by the state, but it was divided between the center and the state. But since now the GST system is applicable and its name is Goods and Services Tax. This means that Article 268 ‘A’ has been abolished under the 101st Constitutional Amendment Act 2016 as it is now a part of GST.

Article 269 – Taxes levied and collected by the Union but entrusted to the States

This article is about tax related to purchase and sale in inter-state trade and commerce. But since the GST is applicable from 2017 onwards, some amendments have been made in this provision. A new article 269A has also been made which is also known as IGST.

So the thing to be remembered here is that whatever provision is there under article 269 is in addition to what is written in article 269A. which is something like-

Taxes on the purchase, sale and consignment of goods in inter-State trade or commerce shall be levied and collected by the Government of India but assigned to the States on or after the 1st day of April, 1996 in the manner provided in clause (2) of this article, or shall be deemed to have been handed over.

Clause (2) states that all tax revenues, except those received from Union Territories, shall not form part of the Consolidated Fund of India. Rather, it will be handed over to the concerned state as per the rules laid down by the Parliament.

Note – By tax on the purchase and sale of goods, here except in newspapers, such tax is meant during the purchase and sale of goods in the course of inter-state trade or commerce.

Similarly, “tax on consignment of goods” here means the person making the consignment or any other person to whom such article is consigned; Taxes levied on taxes that are incurred in the course of inter-state trade or commerce.

Article 269A – Levy and collection of goods and services tax in the course of inter-State trade or commerce

In fact, when there is business from one state to another, it becomes very difficult for the state to collect tax. how that?

They are such that a state can levy taxes only from the areas falling under its state boundary. But trade was done with other states also. Just as a trader from one state sells goods to a trader from another state, the trader who receives the goods will sell the goods in his own state and the tax money will also remain in that state.

Now the former state (from where the goods were sent) will not go to collect tax in that other state, because it is outside its jurisdiction. In such a situation, under Article 269, the central government collects tax from there and gives it to the state which should get it. This is called Central Sales Tax.

But since now there is GST system. That is why article 269A was made. In which service tax has also been added and it is as follows-

Goods and Services Tax (GST) on goods and services in the course of inter-state trade or commerce shall be levied and collected by the Government of India and shall be shared between the Union and the States by the Parliament in such manner as may be recommended by the GST Council.

Note – The difference between Article 269 and Article 269A is that (1) Article 269 deals with goods while Article 269A deals with taxes on both goods and services. (2) Under Article 269, all the money, except the amount received from the Union Territories, is handed over to the states from which the tax has been levied. Whereas under Article 269A, the tax levied and collected by the Government of India is divided between the Center and the States. This arrangement is now known as IGST.

It should also be remembered here that the amount apportioned to a State under Article 269A does not form part of the Consolidated Fund of India.

GST Council – Article 279A

Article 279A of the Constitution under the 101st Constitutional Amendment Act provided that within 60 days from the date of commencement of 2016, the President shall by order constitute the GST Council. And this is how the GST Council came into existence. There are three types of members in this council; The Union Finance Minister is the Chairman. The Union Minister of State for Finance is a member. and the Finance Minister (or any other Minister nominated) of each State Government is a member. A person is elected by the members of the state to hold the office of the Vice-President.

Article 270 – Taxes levied and their distribution between the Center and the States.

All taxes and duties specified in the Union List and surcharges on taxes and duties referred to in article 271, except those levied under articles 268, 269 and 269A, and for purposes specified under any law made by Parliament, Any cess levied shall be levied and collected by the Government of India and shall be distributed on the recommendations of the Finance Commission.

Note- Article 271 has been discussed further.

Here some things are worth noting, understand it properly because it is important-

(1) Article 268, Article 269 and Article 269A have been omitted because it is written in that Act itself that how and who will distribute the taxes.

(2) The taxes collected by the Union under clause (1) of article 246A shall be divided between the Union and the States only in accordance with the recommendations of the Finance Commission.

(3) such tax levied and collected by the Union under clauses (2) of article 246A and section 269A which has been used by the Central Government to pay the tax levied under clause (1) of article 246A, and also out of the share received by the Union under article 269A; be divided between the Union and the States on the recommendation of the Finance Commission.

Article 246A – It has two special provisions with respect to the Goods and Services Tax, which was made a part of the Constitution by the 101st Constitutional Amendment. (1) Notwithstanding anything contained in articles 246 and 254, to Parliament, and subject to clause (2) of that article, to the Legislature of each State; shall have power to make laws with respect to the goods and services tax imposed by the Union or by that State. (2) Where the supply of goods or services or both is by way of inter-state trade and commerce, Parliament has exclusive power to make laws with respect to the goods and services tax. That is, the state legislature can also make laws, but in the case of inter-state trade and commerce and being subject to Parliament.

Finance Commission

The Finance Commission (discussed above) is a quasi-judicial body under Article 280 . It is constituted by the President every five years. The commission performs the following functions and submits its recommendation to the President.

1. Determination of the taxation system between the Center and the States and the determination of the share of such receipts between the Center and the States. 

2. To lay down the principles under which the state can work by taking financial grants from the Centre.

The Finance Commission works to strengthen the Centre-State financial relationship. Now since there is GST regime under which there are generally three types of tax regime. SGST, IGST and CGST;

The states get the full amount of SGST, but the money of IGST and CGST is divided between the center and the state. And how much it will be divided, the Finance Commission decides.

41 per cent has been recommended by the 15th Finance Commission as the share of the states. A separate analytical article is available on Finance Commission, read it for better understanding.

Article 271 – Surcharge for purposes of the Union on certain duties and taxes

Notwithstanding anything contained in articles 269 and 270, Parliament may at any time increase by surcharge for the purposes of the Union any of the duties or taxes referred to in those articles. And the amount that will be received from this increase will be deposited in the Consolidated Fund of India. (but excluding GST leviable under section 246A)

It is important to remember here that under the 101st Constitutional Amendment Act 2016, a new article named Article 246A was created for some special provision of GST. The arrangements made under it are as follows-

Notwithstanding anything contained in articles 246 and 254, Parliament shall have power to make laws with respect to GST levied by the Union or by a State.

Where the supply of goods or services or both is in the course of inter-state trade or commerce, Parliament has the exclusive power to make laws with respect to the goods and services tax. Although the State Legislature can also make laws, but in the case of inter-state trade and commerce and being subject to Parliament.

difference between cess and surcharge

The only difference between cess and surcharge is that when cess is levied, it has to be spent for the same work for which it is levied. For example, if the government imposes a cess for the mid-day meal in the children’s school, then when the money comes, it will have to be spent in that.

There is no such compulsion for surcharge . You can spend that money wherever you want.

Both cess and surcharge are taxes on tax but while cess is applicable to all taxpayers, surcharge is applicable only to taxpayers having income above a limit.

We have read above that under Article 270, the state also gets its share, as the Finance Commission may recommend. It has been arranged in the 2021-22 budget that the cess will be used to compensate the states.

Centre-State Financial Relations and Subsidy Grants

For example, sometimes states need money for some specific work. And the center gives some grant to that state to help it. These grants are of two types, first legal grant and second discretionary grant.

Legal grant

Article 275 says that whenever a state needs a grant, the Center should make it available.

For example, suppose that for the upliftment and welfare of tribes in a state, if the state needs some grant, then the center will give it. But the Center will not give it from its own mind but on the recommendation of the Finance Commission.

However, it is not necessary for the Center to do so for every state. Apart from this, the amount of assistance for different states can also be set differently. And most importantly, it is charged on the Consolidated Fund of India.

Discretionary grant

This grant is also somewhat similar but there is some difference in it. The difference is that the Center is not obliged to give it. If the center feels like it, it can give it or else it may not. That’s why it is called discretionary.

It has been discussed under Article 282 , under which both the Union and the States have the right to allocate grants for any public purpose. Under this, the Center also gives grants to the states.

Centre-State Financial Relations and Credit Provisions

The Constitution provides for the following provisions relating to the borrowing of the Center and the States;

Under Article 292, the Center may, if it so desires, take loans from India or outside India against the guarantee of the Consolidated Fund. But loans cannot be taken above the limit set by the Parliament.

Similarly, if a state takes a loan from anywhere in India, it can take it under Article 293(1) but the loan cannot be taken above the limit set by the state legislature.

Under Article 292(2), the central government can also give loans to the states or if the state takes loans from elsewhere, then its central can be the guarantor.

This means that if a state government takes a loan from any bank or anywhere and is unable to repay, then the central government will have to repay it. That too from the treasury of India.

In this way, if the state already has an outstanding debt, then the state cannot take another loan again without the permission of the Center as per Article 292(3).

Centre-State Financial Relations During Emergency

National emergency – When a national emergency is imposed under Article 352 , the President can reduce or stop the financial transfer if he so desires.

Financial emergency – When a financial emergency is imposed under Article 360 ​​(which has not yet been imposed), the Center can reduce the salaries and allowances of employees engaged in the service of the State, give financial directions to the State, and the Legislature thereof. If a money bill or a financial bill is brought in, it can be withheld for the assent of the President.

Some facts related to center-state financial relations

️ Under Article 285, the property of the Center will be exempted from all taxes of the State. (Here property means land, building, movable property, shares, etc., all those things which have a value)

️ Under Article 286, the State cannot make any law which imposes tax on the import or export of goods or services from that State.

Similarly, under Article 287, the state shall not levy any tax on electricity consumed by the Center or electricity sold by the Central Government or used for running railways.

️ Under Article 289, the assets or income of the State are also exempted from Central taxes. However, with the permission of the Parliament, the Center can impose taxes on certain things.

protection of the interests of the states

In order to protect the interests of the State on financial matters, under Article 274, the Constitution provides that the Parliament should introduce the following bills only on the recommendation of the President;

️ Any such bill in which the interest of the states is and it imposes any tax or duty.

️ A bill that affects the rules of distribution of amounts in the states.

A Bill to impose a surcharge on a particular tax or duty for the purpose of the State.

Trade, commerce and Meetings within the territory of India

Part 13 of the Constitution provides for trade, commerce and Meetings within the territory of India. Which has been described from Article 301 to 307.

Article 301 ensures trade, commerce and Meetings throughout the territory of India, subject to the other provisions of Part 13 of the Constitution.

Under Article 302, Parliament may, having regard to the public interest, impose restrictions on the freedom of trade, commerce or Meetings within any part of the territory of India.

Under Article 303, Parliament or the State Legislature cannot make any law (regardless of what is contained in Article 302) that gives preference to one State to another or differentiates one State from another. .

Under Article 304, the Legislature of a State may impose any such tax on goods imported from other States as on similar goods manufactured or produced in that State. That is, a state shall equate the tax levied on goods produced in its state to the tax on goods imported from another state.

Apart from this, the state also has the power under Article 304 to impose reasonable restrictions on the freedom of trade, commerce and intercourse within that state keeping in view the public interest.

Under Article 307, Parliament may, by law, appoint such authority as may be appropriate for carrying out the purposes of Articles 301, 302, 303 and 304.

Articles related to Centre-State financial relations

Download this Chart – Click Here

Overall, this is the Centre-State Financial Relations , hopefully understandable. Given below is an article on GST, read it for a better understanding of this topic.

[GST Concept]

Centre-State Financial Relations Practice Quiz – upsc

References,
मूल संविधान भाग 12
मूल संविधान 2020 संस्करण
Taxes and Constitutional limitations
Gst and concept
Commentary on Constitution – DD Basu and M Laxmikant
Encyclopedia Etc.