Financial Relations between Centre & State
The main characteristic of federal Constitution is the distribution of powers between the general and the regional governments. The federal principle means “the method of dividing powers so that the general and the regional governments are each within a sphere, coordinate and independent.” It means there should be autonomy for the constituents units. The Indian Constitution contains an elaborate scheme of distribution of powers. But from the scheme of distribution of powers between the Centre and the States it appears that the framers have opted for a stronger Centre. The reason for this are obvious.
Article 245, 246 contain the scheme of distribution of legislative powers. There are three lists Union List, State List and the Concurrent List. The residuary power are wasted on Union. On a subject in the Concurrent list both the Centre and the States have power to make laws, but in case of conflict between the two, the law made by the Centre shall prevail upon the State’s law. Under Arts. 249,250, 252,253 and 356, the Union Parliament is empowered to legislate on any matter in the State list.
In India, the scheme of distribution of sources of revenue between the Centre and the States is based on the scheme laid down in the Government of India Act, 1935. The framers of Indian Constitution desired that the scheme of financial relations be flexible and adaptable to varying needs, and available data. For this they recommended for the appointment of Finance Commission to review the whole position from time to time.
The Constitution under Article 280, therefore provides for the appointment of Finance Commission within two years of the commencement of the Constitution and thereafter at the expiration of every fifth year or at such earlier time as the president consider necessary. It consists of a Chairman and four other members to be appointed by the president.
The Finance Commission is to recommend to the President the requisite changes to be made in the distribution of taxes between the Union and the states; and to define the principle on which the Union Government was to make grants-in-aid to the states.
The Constitution of India thus introduces a unique element of flexibility while tackling the problems of Distribution of public revenues.
ARTICLE 265: TAXATION ONLY BY AUTHORITY OF LAW
A tax is compulsory exaction of money by public purposes enforceable by law and is not a payment for services rendered. A fee is a payment or services rendered, benefit provided or privilege conferred. Article 265 provides that no tax can be levied or collected except by authority of law. No tax can be imposed by an executive order. The law providing for imposition of tax must be valid law, that is, it should not be prohibited by any provisions of the Constitution. Thus, a tax will be void if it violates the fundamental rights to equality guaranteed by Article 14.
In case of Secunderabad Hydrabad Hotel Owners Association v..HMC (AIR 1999 SC 635) it was held that though the element of quid pro quo is necessary in order to determine whether license fee is tax or fee, but it is not essential in cases where the license fee is merely regulatory or compensatory. A license fee maybe either regulatory or compensatory. When a fee is charges for rendering specific services a certain element of quid pro quo must be there between the services rendered and the fee charged so that the license fee is commensurate with the cost of rendering the services although exact arithmetical equivalence is not expected. However, this is not the only kind of fee which can be charged.
In Avinder Singh v. State of Punjab,(AIR 1979 SC 321) it was stated that there is nothing in article 265 which prohibits the legislature to impose a tax twice on a thing.
ARTICLE 268: DISTRIBUTION OF REVENUES BETWEEN THE UNION & THE STATES
The constitution mentions following categories of the Union taxes which are wholly or partially assigned to the States:
- Duties levied by Union but collected & appropriated by the States – As given under article 268 stamps duties which are mentioned in the Union List shall be levied by the Central Government. These duties are collected by the states, which such duties are leviable. The proceeds of such duties are assigned to the states.
- Article 268A: Services Tax levied by Union & collected and appointed by Union & States – This article was added by the Constitution (88th Amendment) Act, 2003 empowering the Union of India to levy service taxes which were to be collected & appropriated by the Union and the States in accordance with such principles as could be formulated by parliament by law, has been omitted by 101th Amendment of the Constitution in 2016.
- Taxes levied & collected by the Union & assigned to the States – The Constitution (80th Amendment) Act, 2000 has amended Article. 269 and substituted new clause (1) and (2) of article 269. The amendment has been enacted on basis of the recommendations of the 10th Finance Commission.
ARTICLE 269 (1)
It provides that the taxes on sale or purchase of goods & taxes on the assignment of goods except as provided under article 269A shall be levied and collected by Government but it must be assigned as per the manner prescribed by parliament.
It says that the net proceeds in any financial years of such tax, except those proceeds represent proceeds attributable to Union territories, shall not form part of the consolidated fund of India; but shall be assigned to the states in accordance with such principles of distinction as may be prescribed by parliament by law.
It parliament exclusive power in respect to interstate gives supplies to make laws related to the manner of distribution of revenue from such supplies between the Centre and the State.
ARTICLE 270: Taxes levied & distributed between Union and States
The Constitution (80th Amendment) Act, 2000 substituted a new article for article 270 which would be deemed to have substituted with effect from 1st day of April, 1996. This article specifically deals with taxes on income other than agricultural income and corporation tax shall be levied and collected by the Union and is distributed by the Union and States.
Further the revenue which shall be transferred to the states is unconditional and the state shall be free use their income as & when they like.
In case of T.M. Kanniyan v. I.T.O. ,it was held that the income tax attributable to Union territories forms a part of the consolidated fund of India. And not necessary to make any distribution of income tax with respect to Union territories as those territories are centrally administered through the president.
ARTICLE 271: Surcharge on certain duties & taxes for purposes of the Union
It provides that if parliament at any time increases any of the duties or taxes mentioned in article 269 as well as 270 except the goods and services tax under article 246A by imposing a surcharge shall form part of the consolidated Fund of India.
ARTICLE 272: Taxes which are levied and collected by the Union & may be distributed between the Union and the States
The Constitution (180th Amendment) Act, 2000 abolished Article 272 of deemed to have come into effect from 1st April, 1996. The effect of abolition of article 272 is that the sum whole or part of Union duties of excise leveid and collected by the Government of India and distributed as grant in aid to the states after 1st April, 1996, but before the commencement of this act, would be deemed to have been distributed n accordance with the provision of article 270.
ARTICLE 275: Grant from Union to certain States
As per (amendment) act under constitution and 22nd amendment which came in effect in 1969, parliament is empowered to make such grants, as and when it is necessary to the states which are in need of financial assistance. The constitution also provides for special grants given to the states which undertake schemes of development for the purpose of promoting the welfare of the ST or raising the level of administration of the Scheduled areas.
Article 276 empowers the states to impose taxes on professions, trades, calling & employment for the benefits of State or of a municipality, district board, local boards or other local authorities.
In case of Amraoti Municipality v. Ram Chandra (AIR 1964 SC 1166) the municipalities of Amraoti, under a pre-constitution law imposed a terminal tax on certain goods. These tax now can only be leveid by the parliament. The municipalities therefore issued a notification imposing taxes on gold and silver which were not taxable under the pre-constitutional law.
The Supreme Court held the notification as unconstitutional on the ground that article 277 could neither permit increases in the rate nor alteration in the incidence.
ARTICLE 277: Savings
This article save the authority of State to levy taxes on subject now forming part of the Union list, immediately before the commencement of the constitution. Thus taxes which are being levied by a State or a municipality or other local authority, notwithstanding that those taxes are mentioned in the Union continue to be levied by those authorities until parliament by law makes contrary provision.
ARTICLE 279: Calculation of net proceeds
It deals with net proceeds of tax reduced by the cost of collection. The certificate of comptroller and the auditor general of India of net proceeds of a tax in a state will be final.
ARTICLE 280: Finance Commission
Article 280 deals with Finance Commission. It consist of a chairman and four other members appointed by the president. In exercise of the power under 80(1), parliament has the Finance (Miscellaneous Provision) Act, 1951.
It provides that the Chairman of the Commission shall be selected from among persons who have experience in public affairs. The other four members shall be selected from among persons who (1) are, or have been, or are qualified to be appointed as judges of a High Court; or (2) have special knowledge of the Finance and accounts of Government; or (3) have had wide experience in financial matters and in administration; or (4) have special knowledge of economics.
The members of the Commission shall hold office for such period as may be specified in the Presidential Order and shall be eligible for appointment. The Commission is empowered to determine its procedure and shall have all the powers of a civil court in respect of summoning and enforcing the attendance of witnesses, production of any document and requisitioning any public record from any court or office.
The scheme of distribution of revenues indicates, like distribution of legislative and administrative powers, a clear tendency towards centralization. The Centre’s resources are many and vast but the State resources are very meagre while the responsibilities of the States are manifold. The state has to implement all the welfare schemes. Consequently, the states are dependent upon Centre for funds.
These funds are given tot eh States by the Centre on the recommendation of the Finance Commission in the form of grants. The States are primarily responsible for the well being of the citizens.
The control of Centre over finance appears to be violation of the principles of federation which is adopted in the Indian Constitution. But this is to be understood in the context of the historical background underlying the Indian Constitution, that is, for consolidating and strengthening the unity of India. It is Central Government which is ultimately responsible for maintaining economic unity and thereby maintaining the welfare of the country.
ARTICLE 285: Exemption of Union Property from State Taxation
Article 285 imposes a restriction on the State to tax property of Union. And says that Union property shall be exempted from all taxes imposed by state or any authority within a State. It may include movable or immovable property.
Further clause (2) saves the State’s power to tax the property of the Union which were taxable by a state under a law passed before to tax the property of the Union which were taxable by a state under a law passed before the commencement of the Constitution, until Parliament by law provides otherwise.
The rule of immunity from State taxation applies only to the instrumentality of the Union of India and not to private bodies.
It prohibits state from imposing tax on consumption or sale of electricity supplied to the government of India or utilized for construction, maintenance or operation of any railway unless parliament by law provides otherwise.
ARTICLE 289: Exemption of State property or income Union Taxation
Article 289 exempts the property and income of State from Union taxation. The immunity from Center taxation is given only to property and income of a State from direct taxes. Immunity is not given from Union’s indirect taxes, e.g., duties of Customs and Excise.
The immunity does not extend to commercial interest, assets and income of the State. Thus, if a State runs roadways or does business in purchasing and reselling of food grains, etc.it acts as private trader, businessman or an industrialist. In this capacity it does not enjoy any immunity under the constitution. Parliament may provide for taxation of such activities.
Under article 285 the Centre’s property is exempted from all States taxes whether it is used for commercial purposes or governmental purposes or governmental purpose. But under article.2899 such an exemption is not available to the State property. The Union of India can levy tax on all kinds of State property.
In State of West Bengal v. Union of India (AIR 1974 SC 1510) the validity of the Coal Bearing Areas (Acquisition and development) Act passed by the parliament was challenged by the state. The act provided for the acquisition of certain lands belonging to the state of West Bengal. It was contended on behalf of the state that the state was sovereign within its allotted field. The court held that parliament was competent to acquire state property and therefore the act was valid.
The court held that under the Indian Constitution the States are not sovereign. The court refused to apply the doctrine of immunity of instrumentality beyond the scope of express provisions in Arts. 285, 287,288 &289 of the Constitution.
In Union of India v. State of U.P (AIR 2008 SC 521)., an appeal was filed by union of India challenging the orders of recovery of service charges on Railways properties situated at Allahabad.
The Supreme Court held that the service charges for supply of water and maintenance of sewerage system of Railway colonies provided by Jal Sansthan is not ‘tax’ on the property of the Union but is ‘fee’, and hence, is not violation of article 285 of the Constitution. It is a charge for service rendered by the Jal Sansthan who has to maintain staff for regular supply of water as well as sewerage system. The exemption of property of Union is from ‘tax’ not form ‘fee’.
It is indeed a hard fact that is the legislative and administrative authority of the constituent units are to be maintained they must be autonomous financially. However, this principle of federalism has not been fully implemented in any of the existing federations of the world. Therefore, the basic principle of federation is that the legislative, executive and financial authority is divided between the Centre and State not by any law passed by the Centre but by Constitution itself.
Author: Nishchal Kukade,
Dr. Babsaheb Ambedkar College of Law, Nagpur Final Year Student