FINANCIAL RELATIONS BETWEEN UNION AND THE STATES: CONSTITUTIONAL AND CRITICAL VIEW

ABSTRACT

The title of this work, ‘Financial Relations between Union and the States,’ clearly indicates the main content of the article. The article deals with the various aspects of the fiscal relationship between the Centre and the States. Constitution of India states the financial relations between them in part XII, chapter I and chapter II. From Article 268 to Article 293, the Constitution has clearly mentioned about what taxes are to be collected by whom and to whom the particular taxes are assigned. After that, the grants in aid given by the Union have been discussed. A major turning point in the financial relationship between Union and the States emerged from the introduction of GST. GST council forms a good part of the discussion along with the powers and roles of the Finance Commission. After the Constitutional analysis, a critical analysis has been formulated in order to analyse the loopholes in the present system and to find ways of making it better.

Keywords

Financial, Article, Union, State, GST, Tax, Finance Commission, Constitution.

INTRODUCTION

The economy of a country is one of the most important factors responsible for the overall well-being of the country in the international sphere, as well as for the well-being of its people along with internal peace and stability. In a vast country like India, which is based on the principle of federalism, it is crucial to have a clear demarcation of how the governments at the centre and the state level would distribute the taxes for the effective administration of our economy. As an unhindered flow of state revenue is crucial for the development of the country, the constitution comes into play, clearly demarcating areas in which the centre and the state have sole powers and where both have shared powers in some areas. This is the idea of federal power shared deeply rooted in the basic structure of the constitution. Financial power sharing is necessary for the effective administration as well as the different regions of the country holding diverse groups of people with diverse or even conflicting needs. Therefore, it is of much importance to study the financial relations between the centre and the state, which would provide us some insights to how the country’s finances are managed and how the governments earn their money.

OBJECTIVES

The main objective of this research paper is to delve deeper into the functioning of the centre and state in fiscal matters and how they share their powers with each other. There would be an in-depth study of the articles from articles 268-293 of part XII of the constitution dealing with centre-state financial relations. Looking at taxing powers and formation of different committees is also an objective. A critical analysis of the clashes between the centre and the states for fiscal power sharing and suggestions to solve these disputes are also discussed.

CONSTITUTIONAL VIEW

The fiscal relations between the union and the states are quite well established in the Constitution of India demarcating the boundaries within which they must function and also the areas of shared powers within themselves. Article 268 to Article 293 in the part XII, that is, Finance, Property, Contracts and Suits, consists of the matter of financial relations between the Union and the States. These set of articles have been classified under categories in order to explain their specific area they deal with.

REVENUE DISTRIBUTION BETWEEN THE UNION AND THE STATES

THREE LISTS

The distribution of revenue between the Union and the States done as per the powers given to them in the three types of lists in the constitution, Union list, State list and Concurrent list.

The Union list has 13 subjects and only the parliament has exclusive powers to levy taxes on these.

The State list consist of 18 subjects to which the state legislature has sole right to levy taxes upon.

While, on the other hand, the concurrent list has no tax entries in it as this may lead to confusion.

Moreover, the residuary powers, that is, the subjects not dealt in any of the Union and State list are covered under the Residuary powers of taxation and parliament has sole rights to deal in them.

TYPES OF TAXES ON THE BASIS OF LEVYING AND APPROPRIATION

ARTICLE 268 – Taxes levied by the Union but collected and Appropriated by the States.

Stamp duties as mentioned in the Union List like bills of exchange, promissory notes, insurance policies, etc. are levied by the Union of Inda but are actually collected by the states and not be a part of the consolidated funds of India, that is, are also appropriated by the state. [1]

ARTICLE 269 – Taxes collected and Levied by the Centre but assigned to the States.

The taxes on Sale and Purchase and consignment of goods in case of inter-state trade or commerce shall be deemed to have been levied by the Union of India.

Net proceeds would go to the states and not to the consolidated funds of India and the share of the distribution would be distributed by law made by the parliament. [2]

ARTICLE 269 A – Levy and collected of Goods and Services Tax in case of Inter-state Commerce.

In case of inter-state trade, the good and services tax (GST) on case of inter-state trade and commerce, the duty of collection of taxes are vested on the centre but the taxes are appropriated by the centre and the states together and the manner of distribution may be done by the parliament on the recommendation of the Goods and Services Tax (GST) Council.

The parliament can decide upon the place and time on to which the supply of goods or services or both would take place within the limits of inter-state trade or commerce. [3]

ARTICLE 270 – Taxes levied and Collected by the Union and Distributed between Union and the States.

This tax category includes in itself all categories of taxes that are there in the Union list except for these taxes –

Taxes and duties included in articles 268, 269 and 269A.
Surcharge on taxes and duties referred to in Article 271, which will be discussed below.
Cess levied for specific purposes.

For all such taxes, the net proceeds shall not go to the consolidated funds of India but shall be distributed among the States and the Centre in the manner prescribed by the Finance Commission which has been constituted by the President of India and the President providing assent to the recommendation of the Finance Commission after its consideration. [4]

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

Parliament by law, any time, at its will, increase any of the taxes or duties as mentioned in Article 269 and Article 270. And the surcharge amount goes directly to the consolidated funds of India, that is, for the purpose of the Union

However, Article 246A which deals with the matters of Goods and Services Tax (GST) has been put as an exception to the ambit of this article. [5]

GRANTS AND AID TO THE STATES

There can be two categories of grants that can be made by the centre to the states. These are –

STATUTORY GRANTS –

Article 275 talks about grants from centre to certain states. Not all the states are given the grants in aid of the revenues. The parliament by law provide for such grants if it may think the requirement of it for certain states. Also, different states may be given different amounts.

The grant is provided from the consolidated funds of India for the states to run schemes for raising the level of administration within the Scheduled Areas within the states including the State of Assam. [6]

Article 272 talks about grants given to export duty on jute and jute products. The states of Assam, Bihar, Odisha and West Bengal are given grant in aid of revenues for export of jute and jute products from the consolidated funds of India. The grant shall continue to be charged till the time parliament continue to levy export duty on jute or jute products or till ten years from the commencement of the Constitution of India. [7]

DISCRETIONARY GRANTS –

Article 282 of the Constitution of India contains the provision where the Union or the States can give grants for public purposes It gives a discretionary power to the centre to provide grants to states so that states can complete their planned developmental activities. [8]

GST COUNCIL

ORIGIN – Article 279A of the Constitution talks about the Goods and Servies Tax Council which was added in the constitution by the 101^st Constitutional Amendment Act, 2016. This requires the President of India to constitute a GST Council within sixty days of the commencement of the 101^st Amendment Act.
MEMBERS – The Goods and Services Tax (GST) Council shall have the following members –

a. The Union Finance Minister as the Chairperson.

b. Union Minister of State in charge of Revenue and Finance as a member.

c. The Finance and Taxation Minister of state or any other minister nominated by the State Government as members of the Council.

The members nominated by the states shall among themselves decide the Vice-President of the Council

3. POWERS – The powers of the GST Council are to provide recommendation to the Centre and the States on the following matters –

a. Taxes, cess and surcharges levied by the Union and the States.

b. The goods and services that can be exempted from GST.

c. The GST laws, principles of appropriation in case of inter state trade.

d. The threshold limit of turnover below which goods and services can be exempted from the ambit of GST.

e. The rates including the floor rates of GST.

f. Any special rate for additional resources during the time of calamities.

g. Special grants for the hilly states like Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand including the former state of Jammu and Kashmir.

h. Any other thing that the Council may think would be required. [9]

FINANCE COMMISSION

Article 280 deals with the Finance Commission. It states that within two years of the commencement of the Constitution, the President, by order, would constitute a Finance Commission and reconstitute after its expiration of every five years. The Finance Commission shall consist of five members and one of them would be the Chairman.

The parliament would determine the qualifications required for the members who are to be appointed in the finance Commission.

The recommendation power of the Finance Commission is in the following areas –

The distribution of the net proceeds between the centre and the states and how the taxes are to be distributed between the states.
The principles relating to the grant-in-aid given to the states from the consolidated funds of the centre.
The measures in the state level for finance to the local Panchayats and Municipalities are recommended by the State Finance Commission. [10]

INTER-GOVERNMENTAL TAX IMMUNITIES

The doctrine of Inter-Governmental tax Immunity is first time developed in United States of America by the Supreme Court[11]. It was a flexible law first but the other countries like Cananda and Australia use it in a restricted manner. In India too, this doctrine is followed in a restrictive manner. Later on, it became restrictive in U.S.A. too.

Inter-governmental tax immunity means the centre and the state exempt each other from taxes that would have been levied to their respective properties. Article 285 and Article 289 of the Indian Constitution recognises mutual exemption from taxation.

EXEMPTION OF UNION PROPERTY FROM STATE TAXATION – Under Article 285 of the Constitution of India, the Union is exempted from all taxes imposed by a state or any authority of a state as per clause (1).

Clause (2) of this article saves states’ power to tax a central property if any law provides such power before the commencement of this constitution, unless otherwise altered by the parliament. [12]

The term ‘property’ here implies all kinds of property, i.e., movable or immovable.

Further, it is important to mention that the immunity does not extend to the corporations or private bodies of the Union as they are separate legal entities.

Article 287 talks about exemption from state taxes on electricity used by the Centre, whether consumption or sale, unless provided by law made by the parliament.

Consumption or sale here implies consumed or sold by Government of India or for the purpose of construction, maintenance or operation of railway operated by the Government of India or any such railway company authorised to do so. [13]

EXEMPTION OF PROPERTY AND INCOME OF STATE FROM TAXATION OF UNION – Article 289 of the constitution states that the property and income of the States are exempted from the Union taxation. But the parliament, by law, can impose tax on any trade or business which can be instrumental for the functioning of the state government. Therefore, the immunity only lies in the imposition of direct taxes, but several indirect taxes may be imposed by the centre on the state. [14]

In the case of State of West Bengal v. Union of India[15], an act named Coal Bearing Areas (Acquisition and Development) Act passed by the parliament which provided for the acquisition of certain lands belonging to the State of West Bengal. This was challenged in the Supreme Court, but supreme court held that a state is not a sovereign and the central law would prevail. Therefore, the court made a restrictive interpretation of articles related to the tax immunities. [16]

CRITICAL VIEW

There lies several problems and loopholes as far as the power sharing over fiscal matters is concerned. These are –

VERTICAL FISCAL IMBALANCE –

The Constitution of India is federal in nature. But it is not a perfectly federal constitution. The quasi-federal nature of our constitution was intended to create a strong central government. It is evident in the distribution of financial powers too. The central government has clearly been given a leverage over the states in the collection of taxes and its distribution. In Article 285, the centre is exempted from all kinds of taxes on its property but such exemption is not given to state and the parliament, if it feels to be fit, can any time impose taxes on any additional trade or business of the states.

OVER-RELIANCE ON GRANTS FROM CENTRE –

The centre has been provided with its power to provide grants in aid in terms of revenue. There is the provision of statutory grants (Article 275) in the constitution, but the discretionary grants (Article 282) given in the constitution provides much of power in the hands of centre to decide on a state’s finances.

RESTRICTION ON STATES’ TAXING POWER –

The Constitution put clear restriction on the power of the state to sale and purchase of goods which takes place outside the state or in case of import or export in Article 286. Therefore, as the states are not able to levy tax on these, centre comes to the scenario.

Also, in case of Inter-state trade and commerce too, a state cannot impose tax on it as well.

RESTRICTION ON STATES’ BORROWING POWERS –

Borrowing comes in chapter II of Part XII, Article 292 deals with borrowing by Union government and Article 293 deals with borrowing by state government. As per the constitution, the Central government can borrow within the country and also from abroad, whereas, the states governments can borrow only within the country.

The Central government can impart loans and give guarantees using the consolidated funds of India. On the other hand, the state government cannot raise loan without the consent of the Central government.

INTER-STATE DISPARITIES –

Inter-state disparities in taxation and grants are also a major cause of dispute between the centre and the states in financial matters. The southern Indian states like Tamil Nadu, Karnataka give move tax to the centre as compared to the other states but they less grants. Due to the higher population and less development, the states like Bihar get more grants as compared to others. This creates dissatisfaction among other states.

LACK OF FISCAL INDEPENDENCE OF LOCAL GOVERNMENT –

In the tussle of Union and the state governments, the provision of financial independence in the constitution is often overlooked by both the centre and the states. The local government, that is, municipality and panchayats, often lack financial resources to carry out welfare measures at the grassroot level. [17]

CONCLUSION

Therefore, the functioning of the Centre and the state in light of the distribution of financial powers between them is not much harmonious. It has its ow nuances and loopholes to it. Several commissions like that of Sarkaria Commission, Rajamannar Committee, Anandpur Sahib Resolution have been made as an attempt to resolve the areas of conflict between that of the Union and the States. It is evident to note that the underlying idea of creating a dominant centre is to create a strong union government which has its own pros and cons. But the quasi nature of federalism in India has also led to several issues as we have discussed above. Besides these conflicts, some positive actions have been taken to make the system of taxation clear and concise, i.e., the introduction of GST.

Therefore, the idea of the contemporary policy makers is now to set up a cooperative federalism model which would foster the development of India as a whole and help in mitigating problems of regional conflict and disparities.

REFERENCES

IND. CONST XII, § 268293.
DR. J.N. PANDEY, CONSTITUTIONAL LAW OF INDIA, 705-717 (Central Law Agency 2015)
M LAXMIKANTH, INDIAN POLITY, (McGraw Hill Education India Private Limited 2020)
DEPARTMENT OF LEGAL AFFAIRS, chapter 8.pdf (legalaffairs.gov.in), (last visited January 23, 2024)
JAGRAN JOSH, Union-State Relations / Centre-State Relations (jagranjosh.com), (last visited January 23, 2024)
INDIAN KANOON, Indian Kanoon – Search engine for Indian Law, (last visited January 233, 2024).
O.C. Sud and Punam Kumari, Fiscal Ambiguities Between Centre and States, 74, Indian Political Science Association, 289, 290, 2013.

[1] IND. CONST. XII, § 268.

[2] IND. CONST. XII, § 269.

[3] IND. CONST. XII, § 269A, amended by The Constitutional (101^st Amendment0 Act, 2016.

[4] IND. CONST. XII, § 270.

[5] IND. CONST. XII, § 271.

[6] IND. CONST. XII, § 275.

[7] IND. CONST. XII, § 272.

[8] IND. CONST. XII, § 282.

[9] IND. CONST. XII, § 279A.

[10] IND. CONST. XII, § 280.

[11] Mechulloch v. Maryland, 4 Weaton 316 (1819)

[12] IND. CONST. XII, § 285.

[13] IND. CONST. XII, § 287.

[14] [14] IND. CONST. XII, § 289.

[15] AIR 1974 SC 1510.

[16] JAGRAN JOSH, Union-State Relations / Centre-State Relations (jagranjosh.com), (last visited January 23, 2024)

[17] DEPARTMENT OF LEGAL AFFAIRS, chapter 8.pdf (legalaffairs.gov.in), (last visited January 23, 2024)

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