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Central State Financial Relations in India

by Reethu S Arya
November 30, 2021
in Articles, General Knowledge
Central State Financial Relations in India
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The Indian constitution focuses on reconciling the country’s unity while giving the power to maintain state to the State governments. It is a known fact that the union has been assigned larger powers than the state governments, but it is not of quality instead degree that matters the most. In India, the Centre-States relations comprise the core elements of federalism. The Central Government and State Government coordinate with each other for the well-being and safety of the citizens of India. They work together in every possible aspect like the field of environmental protection, terror control, family control, and socio-economic planning. All the essential features of a federation are depicted in the Indian constitution. It is often defined to be quasi-federal in nature.  It is generally said that the Indian Constitution is primarily federal in nature even though it has unique features that enable it to assume unitary features upon the time of need. Federal but its spirit is unitary.

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Central State Financial Relations:

The Indian Constitution has made detailed provisions, regarding  the distribution of the taxes as well as non-tax revenues and the ability of borrowing, supplemented by provisions for grants-in-aid by the Union government  to the State Government. According to Article 268 to 293 which deals with the provisions of financial relations between Central and States. It is the Constitution that divides the taxing powers between the Central and the state government. The Parliament has authority to levy taxes on subjects enumerated in the Union List, whereas the state legislature has power to levy taxes on subjects enumerated in the State List. Both the central and the states  can levy taxes on the subjects enumerated in Concurrent List whereas residuary power of taxation can be executed by the Parliament only.

Distribution of the tax-revenue:

1. Duties distributed by the Union but Collected and Appropriated by the States, for example Stamp duties on bills of Exchange, etc., and Excise duties on medical and toilet preparations containing alcohol. These taxes don’t contribute for the part of the Consolidated Fund of India, but are assigned to that state only.

2.  The Service Tax are Levied by the Centre but Collected and Appropriated by the Centre and the States.

3. Taxes are distributed and collected by the Union, but Assigned to the States for example,  taxes on the sale and purchase of goods in the course of inter-state trade or commerce or the taxes on the consignment of goods in the course of inter-state trade or commerce.

4. The Taxes distributed  and Collected by the Union and Distributed between Union and the States: Certain taxes shall be levied as well as collected by the Union, but their proceeds shall be distributed between the Union and the States in a certain proportion, in order to effect on equitable division of the financial resources. This category includes all taxes referred in Union List except the duties and taxes referred to in Article 268, 268-A and 269; surcharge on taxes and duties mentioned in Article 271.

5. Exchange  on certain duties and taxes for purposes of the Union for example, Parliament can  increase any of the duties or taxes referred in those articles for purposes of the Union and the whole proceeds of any such surcharge shall form part the Consolidated Fund of India.

Grants-in-Aid

In addition to sharing of taxes between the Center and the States, the Constitution provides for Grants-in-aid to the States from the Central resources.

There are two types of grants,
1. Statutory Grants: These grants are given by the Parliament out of the Consolidated Fund of India to such States which are in need of assistance. Various States may be granted different sums. Specific grants are also given to promote the welfare of scheduled tribes in a state or to raise the level of administration of the Scheduled areas therein (Art.275).

2. Discretionary Grants: Center provides certain grants to the states on the recommendations of the Planning Commission which are at the discretion of the Union Government. These grants are given to help the state financially to fulfill plan targets (Art.282).

In case of Emergency

  • It is given that during National Emergency the President by order can direct that all provisions regarding division of taxes between Union and States and grants-in-aids remain suspended.
  • In such suspension shall not go beyond the expiration of the financial year in which the Proclamation ceases to operate.
  • During financial emergency the Union can give directions to the States.
  • The union can assign the state to observe such canons of financial propriety as specified in the direction.
  • The union can assign the state to reduce the salaries and allowances of all people serving in connection with the affairs of the State, including High Courts judges.
  • The union can assign the state to reserve for the consideration of the President all money and financial Bills, after they are passed by the Legislature of the State.

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I hope this article was helpful. If you are a candidate who wants to pursue a career in the banking sector and looking for a good start, our  Entri app has got it covered for you. Our team will help you with content and insights related to the examination. Feel free to post any queries and doubts in the comment section. We will try our best to reach out. Push away all those self-doubts and negative thoughts. Try to have a clear vision. Ask yourself why you want this. Focus on the good and work hard. There is a saying that goes like this, Get up and set your shoulders to the wheel-how long is life for you? as you have come to this world leave some mark behind or where is the difference between your trees and stones they too come into existence decay and die. Today is the day, hope for the best. Good luck

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Reethu S Arya

Reethu S Arya

Reethu is a learner, orator and storyteller who keeps it all to herself unless it’s for exams and grades. She claims her spirit animal to be a cute fluffy panda (not your regular ones)and has been its disciple since day one! She thinks she connects more with words than with people. She believes her writings will someday help somebody in some way as they did with her!

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