Financial Relation Under Center State Relations: A Detailed Analysis

Introduction

In Indian Constitution, the Financial Relation under Center State Relations is mentioned in the article of 268 to 293 in detail. This is an important topic under Center state relations, this is why students who are preparing for government exams are want to increase their knowledge about Financial Relation under Center State Relations.

If you are also here to gaining information about the same, then please be with us till the end of this article.

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Financial Relation Under Center State Relations

In India, the financial relation between the Centre and the States is an important aspect of the Center-State Relations. Here are some details about the financial relation under Center State Relations:

Distribution of Financial Resources

The Constitution of India provides for a mechanism or a structure for the distribution of financial resources between the Centre and the States. The taxes collected by the Centre and the States are divided according to the provisions of the Constitution.

Taxation Powers

The Constitution of India grants the power to levy and collect taxes to both the Centre and the States. The Union List contains taxes that can be levied and collected by the Centre, while the State List contains taxes that can be levied and collected by the States. The Concurrent List contains taxes that can be levied and collected by both the Centre and the States.

Grants-In-Aid

The Centre provides financial assistance to the States in the form of grants-in-aid. These grants are given to the States to support their development projects and to help them in meeting their expenditure requirements.

Finance Commission

The Finance Commission is a constitutional body that is responsible for recommending the distribution of financial resources between the Centre and the States. The Commission is appointed every five years and makes recommendations based on the financial situation of the country.

Planning Commission

The Planning Commission was a non-constitutional body that used to play an important role in the financial relation between the Centre and the States. The Commission used to prepare five-year plans for the development of the country and allocated resources to the States accordingly. However, the Planning Commission was replaced by the NITI Aayog in 2015.

Fiscal Federalism

Fiscal federalism refers to the way in which financial resources are distributed between the Centre and the States. The goal of fiscal federalism is to ensure that the States have enough financial resources to carry out their functions without compromising the financial stability of the country as a whole.

Borrowing Powers

The Constitution of India grants borrowing powers to both the Centre and the States. However, the Centre has more borrowing powers than the States. The Centre can borrow money from the market and from international institutions, while the States can only borrow from the market.

Dispute Resolution

Disputes between the Centre and the States regarding financial matters can be resolved by the Finance Commission or by the Supreme Court. The Finance Commission is responsible for making recommendations regarding the distribution of financial resources, while the Supreme Court can adjudicate on disputes related to financial matters.

Allocation of Taxing Powers

The Indian Constitution provides for a three-tier system of taxation, with taxing powers distributed between the central government, state governments, and local bodies. The allocation of taxing powers is primarily done through three lists: The Union List, the State List, and the Concurrent List.

The Union List consists of subjects on which only the central government can levy taxes, the State List consists of subjects on which only the state governments can levy taxes, and the Concurrent List consists of subjects on which both the central and state governments can levy taxes.

Distribution of Tax Revenue [Article 268, 268-A, 269, 270 & 271]

Article 268 of the Indian Constitution provides for the distribution of taxes on certain commodities between the central and state governments. These include excise duties on tobacco, alcohol, and narcotics. Similarly, Article 269 provides for the distribution of taxes on goods and services in inter-state trade and commerce.

Article 270 deals with the distribution of taxes on income and other sources between the central and state governments. It includes taxes such as income tax, corporate tax, and customs duty. The tax revenue collected by the central government is distributed among the states as per the recommendations of the Finance Commission.

Article 271 deals with the distribution of surcharge on certain taxes levied by the central government among the states.

Distribution of Non-Tax Revenues

Apart from taxes, the central government also earns revenue from various non-tax sources such as dividends, profits, and interest on loans. The distribution of non-tax revenue is done on the basis of the recommendations of the Finance Commission.

Grants-in-Aid to the States (Article 275 & 285)

Article 275 of the Indian Constitution empowers the central government to provide grants-in-aid to the states for specific purposes. These grants are given to states that have a low per capita income, a high population density, and inadequate financial resources. Article 285 provides that no tax shall be levied or collected by the central government for the purposes of any state unless the state agrees to such imposition.

Finance Commissions (Article 280)

Article 280 of the Indian Constitution provides for the appointment of a Finance Commission every five years to recommend the distribution of tax revenues between the central and state governments. The Commission also recommends the principles governing the grants-in-aid to the states by the central government. The recommendations of the Finance Commission are binding on the central and state governments.