In this article we will discuss about the financial relations between centre and state.
Subject-Matter of the Financial Relations between Centre and State:
In financial field too the centre is more powerful than the states. In fact, for their development plans the states are purely dependent on the centre. No state can afford to work without active financial assistance of the central government. Undoubtedly in all federations, the units are financially not self-sufficient, but in India economic dependence of the states on the centre is rather too much.
Division of subjects, as provided in the constitution is of such a nature that the states have many more sources of expenditure than those of income.
Of course, there are taxes which are levied and collected either exclusively by the states or centre, but there are also taxes which are collected by the states on behalf of the centre, white some of the taxes are collected by the union government and handed over to the states. On the whole, however, the states are to depend on the grant-in-aid to be given by the central government to the states.
In India system of taxation is very much based on the Act of 1935, with the provision that after every five years President shall appoint a Finance Commission to find out the ways and methods of properly distributing sources of income. The states are empowered to collect taxes, such as stamp duties, excise duties, etc., but are not required to deposit the amount so realised with the Union Government.
The taxes on such items as succession to property, terminal taxes on goods carried by railways, air force or navy, tax on railway fares and freights, tax on transactions in stock exchanges, etc., are to be collected by the Union Government but to be appropriated to the state governments.
It is also provided that the taxes on such items as income other than agricultural income, duties on excise, etc., will be levied and collected by the Union Government and shared between the Union and the States. Since the states have comparatively less sources of income, the central government provides grant-in-aid to them to ran their administrative and development expenses.
The states receive grant-in-aid for the development of scheduled castes and scheduled tribes. Similarly the State of Assam receives special grant-in-aid for the administration of tribal areas.
There is no denial that the states are financially dependent on the centre for their financial allocations, out the system of appointing Finance Commissions has brought much flexibility in it.
In the words of Pylee, “No other federal constitution makes such elaborate provision as the Constitution of India, with respect to the relationship between the Union and the States in the financial field. In fact, by providing for the establishment of Finance Commission for the purpose of allocating and adjusting the receipts from certain sources, the Constitution has made an original contribution in this extremely complicated aspect of federal relationship.”
The states are financially dependent on the Centre.
The distribution of financial resources between the Centre and the States is as under:
1. Taxes Exclusively Assigned to the Union:
(i) Customs and export duties
(ii) Income tax
(iii) Income from railways and postal departments.
(iv) Excise duty on tobacco, Jute cotton.
(v) Estate duty and succession duty in respect of property other than agricultural land.
(vi) Corporation tax
(vii) Taxes on Capital values of both individual and companies assets.
2. Taxes Exclusively Assigned to the States:
Succession and estate duty in respect of agricultural land.
Taxes on Vehicles used on roads, animals, boats. Income from land revenue and Stamp duty except on documents included in the Union List.
Taxes on consumption or sale of electricity.
Taxes on goods and passengers carried by road or inland water.
Taxes on lands and buildings. Taxes on Professions and traders.
Duties on alcoholic liquors for human consumption. Taxes on opium and narcotic drugs.
Taxes on entry of goods into local areas.
Entertainment and amusement tax
Taxes on gambling
3. Taxes Leviable by the Union but to be Collected and Appropriated by the States:
Taxes on luxuries and bettings.
Taxes on bill of landing, letters of credit.
Stamp duties on bills of exchange, cheques and promissory notes.
Excise duty on medicinal toilet preparations.
4. Taxes Levied and Collected by the Union but Assigned to the States:
Duty in respect of succession to property other than agricultural land.
Taxes on railway freights and fares.
Taxes on transactions in stock exchanges.
Terminal taxes on goods and passengers carried by railway, sea or air.
Taxes on sale and purchase of news papers and on advertisements published there in.
5. Taxes levied and collected by the Union but shared with the States.
The basis of distribution in this case is decided by the Parliament by law. The taxes include tax on.
income other than agricultural income.
excise duties other than that leviable on medicinal and toilet preparations.
In the financial field a mention may also be made to the office of the Comptroller and Auditor General of India, who is appointed by the President of India. He can direct the state governments to keep their accounts in a particular manner and these are duty bound to obey his instructions. While doing so he need not consult any state government.
But in times of financial emergencies control of the union government over the states is immense. As soon as financial emergency is declared the Union government becomes so powerful as to direct the state governments to observe certain norms of financial propriety and other necessary safeguards.
It can also direct the state governments to reduce salaries and allowances of its employees and even those of the judges of the High Courts. All money bills passed by the legislature, then are to be reserved for the consideration of the President.
In Centre state financial relations Finance Commission plays an important role. According to the Constitution the President is empowered to set up a Finance Commission after every five years to make recommendations to him about the distribution of net proceeds of taxes to be divided between the centre and the states.
The Commission is also required to suggest the principles on which grant-in-aid of the revenues should to be given to the state governments out of Consolidated Fund of India.
It is also required to give its view on any matter which may be referred to it by the President in the interest of sound finances. So far President of India has been regularly setting up such a commission after every five years and each time its terms of reference has been made wider and wider.
By and large, Union Government has also been accepting its recommendations and as such it has adopted liberal attitude about the recommendations of the Commission.
The Commission has touched even such subjects as debt burdens of the states, returns of public section undertakings, etc. But even then there is demand by some states that distribution of resources should be such that these favour relatively poor states.
The role of Finance Commission has considerably eclipsed because increasing role of Planning Commission through which more funds are transferred to the states than through the Finance Commission. Not only this but it is Planning Commission which regulates discretionary grants and not the Finance Commission.
In centre-state relations a very significant role is being played by Planning Commission. It has even reduced the importance of Finance Commission. It is an extra constitutional body. It has more resources to disburse than the Finance Commission.
It decides plan outlay of each state on which depend all developmental activities of the states. Since its meetings are to be presided over by the Prime Minister, therefore, it is virtually dominated by the central government, through which funds flow to the state government.
Grand-in-Aid to the States:
According to the Constitution states are to receive grant-in-aid from the Centre out of Central revenue. It is to be given with the approval of the parliament to a deserving state out of Consolidated Fund of India. The amount in each case is to be decided by the Parliament.
The Central Government also gives grants both capital and recurring to the states for implementation of certain schemes like uplift of scheduled castes and scheduled tribes. Special Grant-in-aid is also given by the Central Government to the state governments of Assam, Bihar, Orissa and West Bengal out of Consolidated Fund of India. The amount to be paid in each case is to be decided by the President of India.
Weak Position of the States:
In administrative, legislative and financial matters, as compared with the centre, the position of the states is very weak. The states are always to look forward to the centre and such a situation continues no matter whether same political party is in power both at the centre and the states, or there are different political parties in position and authority at these two levels of Indian federation.
In financial field, the states are to depend on the central government even for their development. Planning Commission, which finally decides about plan projects plays a big role in the development of the states, though it is the creation of and is controlled by the central government.
Then another reason of state’s dependence on the central government is that all foreign assistance which flows into India and is quite massive, is channelised through the central government. Once the extent of foreign aid is decided and made available to India, it becomes the responsibility of the Central Government to decide in which state and to which extent the money should be poured in.
Under the Constitution, no state on its own can sign any agreement with any international agency or organisation. States government now’s however, are inviting foreign investments in certain priority areas and signing agreements with foreign government.
Not only this, but Central Government can bring any subject from the state to the concurrent list thereby depriving the former of many of its financial resources. Even in the distribution of financial resources, the central government can patronise the states which have political parties of their choice in power and thus use economic power for strengthening its political authority and position.
That is the reason that usually those Chief Ministers who do not belong to the political party in power at the centre, complain that they are being given step-motherly treatment. Though in matters of financial allocation states may be consulted, but in actual practice final decision in this regard finally rests with the centre.
Since there are always financial limitations, therefore, the states which are deliberately made to starve of the finances, can hardly initiate or execute plans of far-reaching magnitude to satisfy the electorates, who had returned them to power on certain promises.
In the words of Misra, “As a consequence of the above, the role of the federal government in controlling in and coordinating the finances of the states is much more important in India than it is in other leading federations.” Dr. K.V.R. Rao once said, “I know no federation where its constituent units are so heavily dependent on the federal government as they are in so-called Indian federation.”