The document outlines the principles governing center-state financial relations in India as per the Constitution, detailing the distribution of powers, financial responsibilities, and mechanisms for tax revenue sharing. Key features include the delineation of legislative subjects, the role of the Finance Commission in recommending tax revenue distribution, and the cooperative federalism principle promoting collaboration between the central and state governments. Additionally, it highlights the transformative impact of the Goods and Services Tax (GST) and the financial dynamics that evolve with amendments and economic policy changes.

1. Centre-state financial relations in India
The center-state financial relations in India is governed by the principles outlined in
the Constitution of India. It delineates the distribution of financial powers and
responsibilities between the central government (Union) and the state
governments.
The key features of the center-state financial relations include:
1. Division of Powers:
● The Seventh Schedule of the Constitution categorizes
subjects into three lists – the Union List, the State List, and
the Concurrent List. The Union List includes subjects on
which only the central government can legislate, while the
State List includes subjects within the exclusive domain of
the state governments.
2. Financial Powers:
● The central government has the authority to levy taxes on
subjects in the Union List, while the state governments have
the power to levy taxes on subjects in the State List.
Concurrent List subjects allow both the center and the
states to levy taxes.
3. Distribution of Taxes:

2. ● The Constitution provides for the distribution of tax
revenues between the center and the states. Taxes levied by
the center (e.g., income tax, customs duties) are collected
by the central government, and a portion is shared with the
states through mechanisms like the Finance Commission.
4. Finance Commission:
● The Finance Commission is a constitutional body that is
appointed every five years to recommend the distribution of
net proceeds of taxes between the center and the states. It
also suggests the principles for sharing non-tax revenues
and grants-in-aid.
5. Grants-in-Aid:
● The central government provides grants to states based on
recommendations from the Finance Commission. These
grants can be in the form of revenue grants, grants for local
bodies, or specific-purpose grants to address regional
imbalances.
6. Consolidated Fund:
● Both the center and the states maintain Consolidated Funds
into which all revenues are credited, and all expenditures
are debited. The revenues collected by each level of
government are spent based on their respective powers and
responsibilities.
7. Inter-State Council:
● The Inter-State Council is a constitutional body that
facilitates cooperative federalism by promoting
coordination between the center and the states on various
issues, including economic and financial matters.
8. Goods and Services Tax (GST):
● The introduction of GST in India has transformed the
indirect tax structure. GST is a comprehensive,
destination-based tax levied at both the central and state
levels. The revenue is shared between the center and the
states through the GST Council.
9. Borrowing Powers:
● Both the center and the states have the power to borrow
money. However, the central government generally has
greater flexibility and access to financial markets compared
to individual states.
10.Control over Expenditure:
● The central government has control over certain
expenditures, especially those related to defense, external

3. affairs, and centrally sponsored schemes. State
governments have control over expenditures related to
subjects in the State List.
11.Planning and Development:
● The Planning Commission, replaced by NITI Aayog, played a
role in coordinating planning and development activities
between the center and the states. NITI Aayog continues to
play a coordinating role in fostering cooperative federalism.
12.Emergency Provisions:
● During a financial emergency, the President of India can
give directions to the states on financial matters. However,
such situations are exceptional and are subject to
parliamentary approval.
The center-state financial relationship is dynamic, and amendments to the
Constitution, as well as changes in economic policies, can influence the fiscal
federalism landscape in India. Cooperative federalism is a key principle aimed at
fostering collaboration between the center and the states for balanced and
inclusive development.

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