Centre-State Financial Relations | Finance commission

Constitution of India

Centre-State Financial Relations 

In Indian Constitution, PART XII Article 264 to 300 deals with financial relations between Center and State

Article 264 of Indian constitution: Interpretation 

Article 265 of Indian constitution: Taxes not be imposed save by authority of law

This Article says that, No tax shall be imposed/levy save by authority of law. It is a constitutional right 

Article 266 of Indian constitution: Consolidated Funds and public accounts of India and of the States

This Article says deals with Consolidation fund of India, Consolidation fund of State and Public accounts of India

Consolidation fund of India: All revenue received by the government (it may be tax or non tax revenue), all the borrowing and all loans are collectively credited is called consolidation fund of India

There are 2 types of expenditure on Consolidated fund of India

a)Expenditure Charged ON

b) Expenditure Made ON

All the salaries expenses which are mentioned in the 2nd Schedule are “Charged ON”. These expenditures cannot be reduced because they are not put to the vote of the parliament

Other expenses are “Made ON”, which means they can be reduced because parliament votes on such expenditures. Same applies for Consolidated fund of State

Public accounts of India: Article 266 also deals with Public accounts of India and states

Money credited by the public is known as public accounts. Public money in the form of saving like PF, Postal saving bonds, court fines and etc. To use Public accounts money, there is no need of permission from Parliament for taking out of money

Article 267 of Indian constitution: Contingency Fund

This Article says deals with Contingency fund of India and Contingency fund of state

There will be permanent advance in the hands of President/Governor in nature of imprest to meet forced unseen expenditure due to natural calamities 

Note: In war, Contingency fund of India will be used, that expenditure will appropriated by Parliament

 Division of Taxes in Indian Constitution 

Central Government Exclusive Taxes:

Exclusive taxes to Central government, which are imposed by Central government and collected by Central government and retained by Central government 

Some of exclusive list were Central government can imposed taxes 

a) Cooperative tax(income tax on companies)

b) Customs tax

c) Wealth tax

d) Estate duty on non agriculture land

e) Gift tax

f) Capital gained tax

h) Luxury tax

State Government Exclusive Taxes:

State Government can also impose taxes on certain items, which are exclusive tax for State

a) Commercial tax

b) State exercise tax

c) Entertainment tax

d) Property tax

e) Motor vehicle tax

f) Land revenue tax

Article 268 of Indian constitution: Duties levied by Union but collected and appropriated by the States

There are certain taxes imposed by Center but collected and retained by State

Ex: a) Stamp duty (No Judicial)

b) Tax on medicines and other cosmetic preparation which contain alcohol as base

Article 268(A) of Indian constitution: Service tax levied by Union and collected and appropriated by Union and the States

This Article says deals with Service tax, which imposed by Central government and collected and retained by Center and State. This was added in 2003 by 83th Amendment

Article 269 of Indian constitution: Taxes levied and collected by the Union but assigned to the States

Some taxes are imposed and collection by Central government but collected amount is given to States   

Ex:  a) Terminal Tax (Interstate transport)

b) Taxes on Railway fares and freights

Article 270 of Indian constitution: Taxes levied and distributed between the Union and the States

There are certain taxes which were imposed and collected by Central Government but the collected net amount is divided between center and state

Ex: Income tax, Central excise

However in 2000 by 80th amendment, It was amended that all the taxes are divisible between Center and State expect the exclusive tax

Article 271 of Indian constitution: Surcharge on certain duties and taxes for purposes of the Union 

Surcharges imposed on the taxes will exclusively goes to the Central government. Surcharge is tax on tax

Article 272 of Indian constitution: Repealed

Article 273 of Indian constitution: Grants in lieu of export duty on jute and jute products

This Article says that, Central government provides compensatory grants to such states which are producing Jute and Jute production

Example: Jute – West Bengal, Orissa, Bihar

Article 274 of Indian constitution: Prior recommendation of president required to bills affecting taxation in which states are interested 

This Article says that, Prior Permission of President requires for imposing the taxes on State items

Article 275 of Indian constitution: Grants from the union to certain states 

This Article says that, Central government provide grant in aid to the states for special development activities related to SC/ST on recommendation of Finance commission

 Finance commission | Constitution of India

Article 280 of Indian constitution: Finance commission

President of India constitutes the Finance commission under Article 280 for every 5 yrs.

Finance commission consists of 1 chairman + 4 other members

The Qualification and service condition of finance commission will be determined by parliament by law

Structure of Finance commission

a) Chairman, should have the knowledge of public affairs

b) The remaining other members

i) Member one: Must opposes all the qualification of Judges of High court

ii) Member two: Should be expert in economics 

iii) Member three: Should be expert in Financial administration

iv) Member four: Should be expert in auditing and accounting

Functions/Role of Finance commission of India

1) It makes recommendations regarding the division of resources between center and states

2) It make suggestion/recommendations on grant-in-aid to the States under Article 275

3) It also provides/gives advice to the President on all financial matters which are referred to it

By 73rd and 74th amendment in 1993, two more functions has been added to Article 280 to Finance commission

4) Finance commission of India makes recommendation regarding to augment/increase the source of Panchayat and Municipalities from consolidated fund of state

5) According to Article 281 of Indian Constitution,  Finance commission submits its report to President

However the government may or may not accept the recommendation made by Finance commission. Because Finance commission is only advisory body. But usually accepts recommendations of Finance commission 

The recommendation of Finance commission are accepted by government because Finance commission is buffer, mediator, Balancing wheel between Center and State

Article 292 of Indian constitution: Borrowing by the Government of India

Article 293 of Indian constitution: Borrowing by states

According Article 292, Center government can borrow any loans from any where either domestic or international. But State government can borrow only domestic loans

List of Finance commission of India

Center-State relation review commissions

Some commissions have been appointed by the central government as well as state government to review the working of center-state relations and these commissions made certain recommendation

Some of the commission recommendation were outdated

1) 1st Administrative reforms commission(ARC)

1st ARC is appointed in 1966 under the chairmanship of Mouraji Desai but immediately replace by K. Hanumanthaiah

There also a sub-committee on center state relation under 1st ARC, which was headed by M. C. Setalvad- 1st Attorney general of India

2) P.V. Rajamannar commission

In 1963, Tamil Naidu Government appointed this commission to review the center-state relation. This commission submitted report in 1971

These recommendation were totally rejected because the majority recommendation were controversial. It was considered as Anti National report

3) Justice Sarkaria commission 

It is official commission appointed by Central government in 1983 but final report was submitted in 1988.

Report consist of 5000 pages, 247 recommendations

4) 2nd Administrative reforms commission(ARC)

Second ARC commission headed by Veerappa Moily. This commission given 15 reports 

5) Madan Mohan Punchhi commission 2007

He is former Chief Justice of Supreme court. It is 2nd center – state review commission. This Commission made 273 recommendations and report to Government on 30 March 2010.

Memebers of the Commission

Chairman- Justice Madan Mohan Punchhi, Former Chief Justice of India 

Member– Dhirendra Singh, Former Secretary to the Government of India 

Member- Vinod Kumar Duggal, Former Secretary to the Government of India 

Member- Dr. N.R. Madhava Menon, Former Director, National Judicial Academy, Bhopal, and National Law School of India, Bangalore 

Member- Vijay Shanker, IPS (Retd.), Former Director, Central Bureau of Investigation 

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