1. Critical analysis of scheme of financial relations in the Const.

and suggestion for

improvement/recent developments in financial relations between states/distribution of
powers to levy taxes btw c & s in the const

Articles 268-293 of the Constitution provide for relations between Centre and State which
include non-tax revenue and taxes as well, provisions for grants in aid to the States by the Union.
As with other domains, the Centre has power to collect taxes on subjects given the Union List;
the States have power to collect taxes on subjects given in the State List and both are entitled to
collect taxes on subjects given in the concurrent list. Following is the distribution on various
footings as follows:

1. Tax revenue distribution(Article 268)- Taxes which are assigned to states but do not form
a part of the consolidated funds of India include stamp duties on bills of exchange,
cheques, promissory notes, bills of lading, letters of credit, transfer of shares etc. This is
an example of taxes levied by the Union but collected and appropriated by states.
2. Succession duty, estate duty in respect of agricultural land, income tax on agricultural
land stamp duties on bills of exchange, taxes on profession etc are exclusively assigned to
the states.
3. Income tax, excise duty on tobacco, corporation tax, taxes on capital of assets of
individuals and companies are examples of taxes exclusively assigned to the Union.
4. Taxes levied and collected by the Union but assigned to states (Art.269) include taxes
other than stamp duties on stock market transactions and futures market, sale or purchase
of newspapers and advertisements published therein etc.
The fact that the constitution provides mandatory sharing of proceeds from income tax
and permissive sharing of Union excise duty tells the tale of inadequate sources of
revenue for States. Considering this information, the critical analysis of scheme of
financial relations follows
Critical Analysis including suggestions for improvement.
1. The States are most aggrieved by the fact that the taxes that are under the State’s
domain are inelastic and narrow. For ex- Land revenue which falls under the
exclusive domain of the State contributes to only 2.5% of their tax revenue 30 years
after it comprised of 32% of the tax revenue in the year 1951-52.
2. There is an inadequate devolution of taxes levied and collected by the Union which
cause inadequacy of finances for the state.
3. Heavy reliance on the Centre by the States to obtain their share of financial resources.
Especially, in baking and other financial sectors, foreign aid and the RBI for deficit
financing as last resort which also results in erosion of authority, jurisdiction and
initiatives on the States’ part even in their own spheres as given by the Constitution.
4. Although indirect taxes in the State’s domain like Electricity duty, stamp duties and
registration fees are elastic, direct taxes such as Land Revenue, Profession Tax etc.
are extremely rigid.
5. Many States have raised concerns regarding the Centre is making it difficult for the
State’s taxation resources mentioned in Articles 268 and 269 to be realized to their
full potential. These include letters of credit, bills of lading, general insurance policies
which limit the income of states and hindering their development. Although the 88th
amendment made an effort in that direction by insertion of Article 268A which
brought service tax under the States’ purview, with the introduction of the 101st
Amendment Act, it was again excluded along with duties and excise on medical and
toilet preparation. Hence, it maybe suggested that the ambit of these articles be
widened to include more resources as they were last reviewed by the 8th Financial
Commission in the year 1984.
6. The borrowing power of the Central Government is much stronger than that of the
State Governments. The States are not allowed to raise loans from foreign nations and
must depend on the Government of India or public loans. This allows the Centre to
fill its deficit by taking a loan from the RBI, but the States have to stick to their
overdraft facility, which also is limited.
7. Central Government also enjoys the power to shift any subject from the concurrent
list to the Union list by an amendment to the Constitution which further leaves States
vulnerable to depend on even lesser financial resources should the Central
Government decide to do so.
8. The Central Govt. in exercise of its discretionary power may allot more grants-in-aid
or discretionary grants under Article 282 to States which are governed by the same
political party as itself. The exercise of this discretionary power must be curbed by
 adding such provisions in the Constitution as may be necessary to disallow disparity
between States.
9. The Finance Commission’s role under Article 280 is purely advisory in nature and the
Central Government holds power to determine whether to implement the
recommendations made by the Commission or not. It may be advised that the
recommendations of the Commission may be made mandatory to address urgent
needs of States.
10. Variables relied upon by Finance Commissions for allocation of taxes between
different States should be implemented cautiously. For ex- Often, Population share is
considered by many commissions to be a yardstick of need of States. What some
commissions have failed to appreciate is that population indicates “general need” of a
region only when there are no significant differences in physical nature of terrain,
density of population across the area, equality per capita income etc. This is evident
from the fact that the North-Eastern States have remained significantly
underdeveloped than the other areas of the country.

Conclusion

In the light of points made above, if there is one thing that can be said with certainty, it is this
that the share of taxes received by the Centre far outweighs the share of States. Since the balance
of power lies in favour of the Centre, it follows naturally that the States cannot do without active
financial assistance from the Centre and enjoy much lesser autonomy than States/provinces of
other nations such as Canada and Australia owing to the factors stated above. Hence, it can be
said that the Financial relations between the Centre and the States is not purely of a federal
character but a quasi-federal character as also emboldened by the Article 360 of the Constitution
which gives the Centre far reaching powers including powers to direct the States to limit the
salaries of employees of State owned corporations and even Judges of High Courts and the
power to direct state to ‘observe the canons of financial propriety’ etc.

The Centre and States must work in cooperation to fill the loopholes in the existing framework in
the absence of legislative/ constitutional reforms to facilitate rapid and unhindered development
of the nation.
Finance Commission

Article 280 of the Indian Constitution gives for establishment of Finance Commission which has
a tenure of five years after which, it is reconstituted. The functions of the Finance Commission
are as follows:

1. To make recommendations on distribution of net proceeds of taxes between Union and

States.
2. To decide principles which would form basis of grants in aid of the State’s revenue out of
the Consolidated fund.
3. To advise on any matter referred to it by the President in the interest of ‘sound finance’
4. To recommend measures needed to augment the Consolidated fund to supplement the
resources of Panchayats and Municipalities after reviewing the recommendations, if any,
made by the respective State Finance Commissions.

These recommendations made by the Commission are not binding on the Government and are
executed in the name of the President of India.

Composition

The Chairman of Commission is selected from among persons who have had experiwnce in
Public affairs and four other members are selected from among persons who  
 are, or have been, or are qualified to be appointed as Judges of a High Court; or
 have special knowledge of the finances and accounts of Government; or
 have had wide experience in financial matters and in administration; or
 have special knowledge of economics