The document summarizes the centre-state financial relationship in India as established by the constitution. It outlines that the constitution divides taxing powers between the central and state governments. The central government has exclusive powers to levy taxes on items in the union list like customs duty and corporation tax. States have exclusive powers to tax items in the state list like land revenue and sales tax. A Finance Commission is appointed every five years to advise on distributing tax revenues between the central and state governments and granting funds to states. The current system makes states financially dependent on the central government.

1. Centre – State Financial Relationship
The Financial relationship between the Centre (Union) and the States is provided in the constitution. The
constitution gives a detailed scheme of distribution of financial resources between Union and the States. The
constitutionmakesabroaddistinctionbetweenthe powertolevya tax and the power to appropriate the proceeds
of a tax.Thus the legislature which levies a tax is not necessarily the authority which retains the proceeds of a tax
levied.
The constitution grants the Union Parliament exclusive power to levy taxes on several items. The state
legislaturesenjoysimilarpowerwithregardtoseveral otherspecifieditems.Ingeneral,the UnionParliament levies
taxesonitemsmentionedinthe unionlistwhile the state legislatureslevytaxesonitemsmentionedinthe state list.
The subjects on which the union government have the exclusive powers to levy taxes are
a. customs duty,
b. corporation tax,
c. capital gains,
d. surcharge on income tax,
e. railway fares etc.
State’s exclusive power to Tax include:
a. land revenue
b. stamp duty,
c. estate duty,
d. agricultural income,
e. entry tax,
f. sales tax,
g. taxes on vehicles and luxuries etc.
The residuary power of taxation belongs to the centre. It means that the subjects which have not been
includedeitherinthe unionorinthe state listmaybe taxedonlybythe uniongovernment.Inthe matterof taxation,
the constitution recognizes no concurrent jurisdiction. Hence there is no subject who may be taxed both by the
union and the state governments.
Besides the exclusive power of taxation of the union and the state governments, there are 3 other
categories of taxes.
a. Taxes levied by the union government but collected and appropriated by the states. Stamp duties on
bills of exchange, excise duties on medicinal and toilet preparations fall in this category.
b. Secondly, certain duties are levied and collected by the union but the net proceeds of such taxes are
distributed among the states. Each state gets that amount of the tax as is collected within its territory. Succession
duty,estate dutyon propertyotherthan agricultural land, taxes on railway fares and freights, taxes on newspaper
sales and advertisements etc. fall in this category.

2. c. Thirdly, certaintaxesare levied and collected by the union but the proceeds are distributed between
the centre and the states. Taxes on non-agricultural incomes (Art. 270) and excise duties on items in the union list
accept medicinal and toilet preparations, fall in this category.
In this scheme of resource distribution, the central government in India, indeed in every federation has
more money than it needs. This is because, the central government is the government at a distance whereas the
state governments are the governments at hand to the people. The most productive sources of revenue in every
federation are with the centre while the most expensive heads of expenditure are with the states. For the State
Governmentsare directlyresponsibleforthe maintenanceof law andorder and are charged with the responsibility
of carrying on welfare activities such as education, health care, etc. consequently the states have less revenue
incomes than they need. This makes the states financially dependent on the centre which the ruling party at the
centre may use to serve its political ends.
To relieve this dependence, the constitution provides for grants-in-aid to the states. Parliament decides
which states are in need of grants-in-aid. Art. 275 of the constitution provides for grants-in-aid to some states for
the promotion of welfare of the tribal people. States also receive grants-in-aid in cases of natural calamities like
floods or draughts.
The constitutionprovidesforconstitutionof aFinance Commissiontoadvice the Presidentondistributionof
financial resources betweenthe Unionandthe States.A Finance Commissionisappointedeveryfive years. The first
Finance Commissionsubmitteditsreportin1952. The Finance Commissionadvises the President, what percentage
of the income tax shouldbe retainedbythe centre,andwhatprinciplesshouldbe adoptedtodistribute the divisible
pool of the income tax amongthe states.The commissionalsoadvisesthe Presidentonthe questionof grants-in-aid
to be given to the states.
The scheme of divisionof financial resources adopted in India is certainly very complicated. It also has the
effectof makingthe statesfinanciallydependentonthe centre.Sucha scheme iscertainlycorrosive of autonomy of
the states.Statesshouldbe givenmore financialautonomythanisgiven now tomake their political autonomy real.