Introduction

Centre State Financial Relations, delineated in Part XII of the Indian Constitution (Articles 264–293), govern the distribution of financial resources and responsibilities between the central and state governments. These provisions outline mechanisms for revenue sharing, taxation powers, grants-in-aid, and other financial matters. The goal is to ensure fiscal autonomy for states while also maintaining financial stability and equity across the country. These relations play a crucial role in fostering cooperative federalism and ensuring the effective functioning of the Indian federal system.

Financial Relations can be studied under the following heads

• Article 265: Taxes not to be imposed except by authority of law
• Allocation of taxation powers
  • Union List/State List: Parliament/state legislature has exclusive power to levy taxes on subjects enumerated in the Union/State List.
  • Residuary Power: The residuary power is vested in the Parliament. Under this provision, the Parliament has imposed gift tax, wealth tax and expenditure tax.
  • Concurrent List: There are no tax entries in the Concurrent List. In other words, the concurrent jurisdiction is not available with respect to tax legislation.
• Concurrent Powers for GST Legislation: However, the 101st Amendment Act of 2016 has made an exception by making a special provision with respect to GST.
  • This Amendment has conferred concurrent power upon Parliament and State Legislatures to make laws governing GST.
• Constitutional Distinction: The Constitution along with some restrictions on the taxing power of the states, also draws a distinction between the power to levy and collect a tax and the power to appropriate the proceeds of the tax so levied and collected.
• Distribution of Non-tax Revenues
  • Major Sources of Non-tax Revenues of the Centre: (i) posts and telegraphs; (ii) railways; (iii) banking; (iv) broadcasting (v) coinage and currency; (vi) central public sector enterprises; (vii) escheat and lapse; and (viii) others.
  • Major Sources of Non-tax Revenues of the States: (i) irrigation; (ii) forests; (iii) fisheries; (iv) state public sector enterprises; (v) escheat and lapse; and (vi) others

GRANTS IN AID TO STATES

Borrowing by the Centre and the States

• Center (Art. 292)

• State (Art. 293)

• Can borrow on CFI (Within + Outside India) within limits fixed by Parliament.
• Can make loans to any state or give guarantees in respect of loans raised by any state.

• Cannot raise any loan without Centre’s consent (If there is an outstanding loan to Centre)
• Can borrow on CFS (Within, not outside India) within limits fixed by Parliament

Exemption of Union property from taxation of state
(Art. 285)

• Centre’s property is exempted from all taxes imposed by a state or any authority within a state like municipalities, district boards, panchayats etc. But the Parliament is empowered to remove this ban.
• The property may be used for sovereign (like armed forces) or commercial purposes.
• The corporations or the companies created by the Central government are not immune (as they are separate legal entities) from state taxation or local taxation.

Exemption of State property from central taxation
(Art. 289)

• The property and income of a state is exempted from Central taxation. Such income may be derived from sovereign functions or commercial functions.
• But the Centre can tax the commercial operations of a state if Parliament provides so.
• The property and income of local authorities situated within a state are not exempted from Central taxation.
• Likewise, the property or income of corporations and companies owned by a state can be taxed by the Centre.
• The Centre can impose customs duty on goods imported or exported by a state, or an excise duty on goods produced or manufactured by a state – advisory opinion of the Supreme Court, 1963.

Effects of EmergencyNational Emergency (Art. 352)Financial Emergency (Art. 360)

• The President can modify the constitutional distribution of revenues between the Centre and the states.
• Can either reduce or cancel the transfer of finances (both tax sharing and grants-in-aid) from the Centre to the states.
• Such modification continues till the end of the financial year in which the emergency ceases to operate.

• Centre can give directions to the states:
• To observe the specified canons of financial propriety.
• To reduce the salaries and allowances of all classes of persons serving in the state;
• To reserve all money bills and other financial bills for the consideration of the President.

Distribution of Tax revenues

Committees on Centre-State Relations