In this article, we will discuss Center -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.

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.

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. Legislative relationship 
2. Administrative relations
3. 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 wewill discuss about the  Center-State Financial Relations between the Center and the State .

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

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.

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 subjects above

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 or 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.
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 and 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.

Centre-State Financial Relations

Distribution of revenues between the center and the states

Overall, the discussion of the financial relationship between the Center and the state begins from here. Let’s understand it.

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

The central government starts it, but the tax under this article completely goes to the account of the state. The Center has no authority over this.

In other words, the funds deposited by the Center in any territory are not deposited in the Consolidated Fund of India in the following ways,

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

There is also talk of bringing stamp duty under the ambit of GST. But potable alcohol i.e. liquor has been permanently kept out of 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 the tax related to purchase and sale in inter-state trade and commerce. But since GST is applicable from 2017 onwards, some amendments have been made in this provision. A new Article 269A has also been created 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 these receipts from these taxes shall not form part of the Consolidated Fund of India and shall be subject to the rules laid down by Parliament. will be handed over to the respective state.

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

Similarly “tax on consignment of goods” shall here mean 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. It is called Central Sales Tax (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 something like this-

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.

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

All taxes and duties specified in the Union List except those levied under articles 268, articles 269 and article 269A and surcharge on taxes and duties referred to in article 271 and specified under any law made by Parliament Any Cess levied for specified purposes 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) taxable subjects of the Union List (discussed above) being collected by the Union; That too will be distributed between the Union and the states according to the Finance Commission.

(3) Taxable subjects of the Concurrent List and tax levied and collected by the Union under article 269A used by the Union to pay the tax levied on the subjects of the Union List, and the Union under article 269A The share received will also be divided between the Union and the States on the recommendation of the Finance Commission.

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 of such increase shall be 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 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 top of 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.

Center-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, the first is a legal grant and the second is a 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.

Center-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 according to Article 292(3).

Center-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)

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.

Articles related to Centre-State financial relations

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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.

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Important links,
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मूल संविधान 2020 संस्करण↗️
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