{"id":495,"date":"2020-08-15T16:10:42","date_gmt":"2020-08-15T16:10:42","guid":{"rendered":"https:\/\/www.competitionreview.in\/blogs\/?p=495"},"modified":"2020-08-15T16:11:01","modified_gmt":"2020-08-15T16:11:01","slug":"the-federal-system-2","status":"publish","type":"post","link":"https:\/\/www.competitionreview.in\/blogs\/2020\/08\/15\/the-federal-system-2\/","title":{"rendered":"The Federal System"},"content":{"rendered":"\n

Financial\nRelations
\nBetween The Union
\nAnd The States<\/strong><\/strong><\/p>\n\n\n\n

No\nother federal constitution makes such elaborate provisions as the Constitution\nof India in respect to the relationship between the Union and the States in the\nfinancial field. In fact, by providing for the establishment of
\na Finance Commission (Article 280) for the purpose of allocating and adjusting\nthe receipts from certain sources, the Constitution has made an original\ncontribution in this extremely complicated aspect of federal relationship. The\nsignificance of this provision becomes evident when one takes into account the\nunending conflicts between the federation and the units in the financial field\nthat characterise the working of the other federations.<\/p>\n\n\n\n

Often\nthe federation and the units have tried to raise revenue by taxing the same\nsources such as income-tax. In theory, it may look right, but in practice it\ncreated great inconveniences. The federation thought that the States stood in\nits way of enhanced taxation, while the States looked upon the federation as a\nhindrance to their financial soundness. At the same time, the people thought\nthat they were subjected to double or excessive taxation. There was a constant\nchallenge by the States to the authority of the federation to impose a\nparticular tax. At the same time, the federation, too, resorted to the same\nprocess against the States. Individual citizens, too, challenged the authority\nof either the federation or the States so as to suit their interests. The\nresult was an enormous amount of litigation. The Indian Constitution lays down\na broad scheme for the distribution of revenue resources between the Union and\nthe States. But it has left the task of detailed allocation to the Finance\nCommission to be set up by the President within two years after the\ninauguration of the Constitution.<\/p>\n\n\n\n

The\nbasic principles that guide the allocation of resources between the federation\nand the units are efficiency, adequacy and suitability. It is, indeed,\ndifficult to achieve all the three and at the same time. Constitutional,\nnatural and economic considerations often stand in the way. Even if a certain\nsystem might suggest itself as the most acceptable, it would not satisfy the claims\nand counter-claims of the various States. Hence, the Constitution has attempted\na compromise. According to this, the subject is divided into two parts, namely,\n(1) the allocation of revenues between the Union and the States, and (2) the\ndistribution of grants-in-aid. <\/p>\n\n\n\n

Distribution Of\nProceeds
\nOf Taxes\/Duties<\/strong><\/strong><\/p>\n\n\n\n

The\ndistribution of the tax-revenue between the Union and the States, according to\nthe foregoing principles, stands as follows : <\/p>\n\n\n\n

(A)\nTaxes belonging to the Union exclusively :<\/strong><\/p>\n\n\n\n

1.  Customs.<\/p>\n\n\n\n

2.  Corporation tax.<\/p>\n\n\n\n

3.  Taxes on capital value of assets of\nindividuals and companies.<\/p>\n\n\n\n

4.  Surcharge on income tax, etc.<\/p>\n\n\n\n

5.  Fees in respect of matters in the Union List\n(List I).<\/p>\n\n\n\n

(B)\nTaxes belonging to the States exclusively :<\/strong><\/p>\n\n\n\n

1.    Land Revenue.<\/p>\n\n\n\n

2.    Stamp duty except in documents included in\nthe Union List.<\/p>\n\n\n\n

3.    Succession duty, Estate duty, and Income tax\non agricultural land.<\/p>\n\n\n\n

4.    Taxes on passengers and goods carried on\ninland waterways.<\/p>\n\n\n\n

5.    Taxes on lands and buildings, mineral\nrights.<\/p>\n\n\n\n

6.    Taxes on animals and boats, on road\nvehicles, on advertisements, on consumption of electricity, on luxuries and\namusements, etc.<\/p>\n\n\n\n

7.    Taxes on entry of goods into local areas.<\/p>\n\n\n\n

8.    Sales Tax.<\/p>\n\n\n\n

9.    Tolls.<\/p>\n\n\n\n

10.  Fees in respect of matters in the State List\n(List II).<\/p>\n\n\n\n

(C)\nDuties levied by the Union but collected and appropriated by the States\n(Article 268)<\/strong><\/p>\n\n\n\n

Stamp\nduties and duties of excise on medicinal and toilet preparations (those\nmentioned in the Union List) are levied by the Government of India, but are\ncollected and appropriated :<\/p>\n\n\n\n

(i)\nin the case where such duties are leviable within any Union Territory, by the\nGovernment of India, and<\/p>\n\n\n\n

(ii)\nin other cases, by the States within which such duties are respectively\nleviable.<\/p>\n\n\n\n

(D)\nTaxes levied and collected by the Union but assigned to the States within which\nthey are leviable
\n(Article 269)<\/strong><\/p>\n\n\n\n

1.    Duties on succession to property other than\nagricultural land. <\/p>\n\n\n\n

2.    Estate duty in respect of property other\nthan agricultural land.<\/p>\n\n\n\n

3.\nTerminal taxes on goods or passengers carried by railways, sea or air.<\/p>\n\n\n\n

4.\nTaxes on railway fares and freights.<\/p>\n\n\n\n

5.    Taxes other than stamp duties on\ntransactions in stock exchanges and future markets.<\/p>\n\n\n\n

6.    Taxes on the sale or purchase of newspapers\nand on advertisements published therein.<\/p>\n\n\n\n

7.    Taxes on the sale or purchase of goods other\nthan newspapers where such sale or purchase takes place in the course of\ninter-State trade or commerce.<\/p>\n\n\n\n

8.    Taxes on inter-State consignment of goods.<\/p>\n\n\n\n

(E)\nTaxes levied and collected by the Union and distributed between the Union and\nthe States (Article 270)<\/strong><\/p>\n\n\n\n

1.    Taxes on income other than agricultural\nincome.<\/p>\n\n\n\n

2.    Union duties on medicinal and toilet preparations\nas are mentioned in the Union List and collected by the Government of India.<\/p>\n\n\n\n

\u201cTaxes\non income\u201d do not include corporation tax. The distribution of income-tax\nproceeds between the Union and the States is made on the basis of the\nrecommendations of the Finance Commission. <\/p>\n\n\n\n

Distribution Of\nNon-Tax Revenues<\/strong><\/strong><\/p>\n\n\n\n

The\nprincipal sources of non-tax revenues of the Union are the receipts from\u2014<\/p>\n\n\n\n

Railways;\nPosts and Telegraph; Broadcasting; Opium; Currency and Mint; Industrial and\nCommercial Undertakings of the Central Govern-ment relating to the subjects\nover which the Union has jurisdiction.<\/p>\n\n\n\n

Of\nthe Industrial and Commercial Undertakings relating to Central subjects may be\nmentioned\u2014<\/p>\n\n\n\n

The\nIndustrial Finance Corporation of India; Air India; industries in which the\nGovernment of India has made investments, such as the Steel Authority of India;\nthe Hindustan Shipyard Ltd; the Indian Telephone Industries Ltd.<\/p>\n\n\n\n

The\nStates, similarly, have their receipts from\u2014<\/p>\n\n\n\n

Forests,\nirrigation and commercial enterprises (like electricity, road transport) and\nindustrial undertakings (such as soap, sandalwood, iron and steel in Karnataka,\npaper in Madhya Pradesh, milk supply in Mumbai, deep-sea fishing and silk in\nWest Bengal).<\/p>\n\n\n\n

Grants-In-Aid
\n(Article 275)<\/strong><\/strong><\/p>\n\n\n\n

Federalism\nis not only a unifying, but also a levelling-up force. Among the constituent\nStates of the Union are some which are developed and advanced while others are\nundeveloped or underdeveloped and backward. One of the results expected of a federal\nunion is the opportunity that it should provide for the socially and economically\nbackward units to better their lot. A common method adopted for this purpose is\nthe system of the Union giving grants to the needy States. Article 275 provides\nfor this by empowering Parliament to pay, out of the Consolidated Fund of\nIndia, certain sums every year as grants-in-aid to the revenues of such States,\nto the extent that such assistance is adjudged as necessary. The grants so\nfixed are based upon the recommendations of the Finance Commission. It is not\nnecessary that every State should get grants-in-aid every year. If, in the\nopinion of the Finance Commission, a particular State does not need such\nassistance, Parliament may leave it out while allocating such grants. The\nConstitution, however, makes it obligatory for the Union Government to pay such\ngrants-in-aid to cover the schemes of development undertaken by a State with\nthe approval of the Union for the purpose of promoting the welfare of the\nScheduled Tribes in that State or raising the level of administration of the\nScheduled Areas.<\/p>\n\n\n\n

Finance Commission
\n(Articles 280 and 281)<\/strong><\/strong><\/p>\n\n\n\n

As has been pointed out earlier, the constitutional requirement of\nsetting up a Finance Commission is an original idea. According to this, the\nPresident should, within two years from the inauguration of the Constitution\nand thereafter on the expiry of every fifth year or at such earlier intervals\nas he thinks necessary, constitute a Finance Commission. The Commission will\nconsist of a Chairman and four other members who are all to be appointed by the\nPresident. As the Commission has to be constituted at regular intervals, a\ncertain measure of continuity in the work of these Commissions is ensured. And\neach Commission profits by the work of its predecessors.<\/p>\n\n\n\n

According to Article 280, the Finance Commission has to make\nrecommend-ations to the President on two specific matters and on \u201cany other\nmatter referred to the Commission by the President in the interests of sound\nfinance.\u201d<\/p>\n\n\n\n

It shall be the duty of the Commission to make recommendations to the\nPresident as to\u2014<\/p>\n\n\n\n

(i) the distribution between the Union and the States of the net\nproceeds of taxes which are to be, or may be, divided between them and the\nallocation between the States of the respective shares of such proceeds; <\/p>\n\n\n\n

(ii) the principles which should govern the grants-in-aid of the\nrevenues of the States out of the Consolidated Fund of India;<\/p>\n\n\n\n

(iii) the measures needed to augment the Consolidated Fund of a State\nto supplement the resources of the Panchayats in the State;<\/p>\n\n\n\n

(iv) the measures needed to augment the Consolidated Fund of a State\nto supplement the resources of the Municipalities in the State; and<\/p>\n\n\n\n

(v) any other matter referred to the Commission by the President in\nthe interests of sound finance.<\/p>\n\n\n\n

The President, after considering the recommendations of the Finance\nCommis\u00adsion with regard to income-tax, prescribes by order the percentages and\nthe manner of distribution. Parliament is not directly concerned with the\nassign-ment and distribution of income-tax.<\/p>\n\n\n\n

The importance of the Finance Commis\u00adsion as a constitutional instrument\ncapable of settling many complicated financial problems that affect the\nrelationship of the Union and the States may be seen from the recommendations\nof the last 12 Finance Commissions. The present system of allocation of finance\nbetween the Union and the States is almost entirely the result of these\nrecommendations.<\/p>\n\n\n\n

Viewing the Union-State relationship in the financial field as a\nwhole, one finds that it is in harmony with the general nature of the Indian\nfederalism, namely, the tendency for centralisation. The Union Government is\nfinancially stabler and stronger than the State Governments. This was necessary\nto facilitate the planned development of the country as a whole and to check\nparochial and even separatist tendencies in the economic activities within\nindividual States. As it is, the States are, in view of their limited\nresources, bound to look up to the Union for financial aid for most, if not\nall, developmental projects. Naturally, they will have to follow the lead of\nthe Union and often even submit to its dictates.<\/p>\n\n\n\n

Financial\nControl By The Union In Emergencies<\/strong><\/strong><\/p>\n\n\n\n

As in the legislative and administrative\nspheres, so in financial matters, the normal relation between the Union and the\nStates (under Articles 268-279) is liable to be modified in different kinds of\nemergencies. Thus, (a) while a Proclamation of Emergency [Article 352(1)] is in\noperation, the President may by order direct that, for a period not extending\nbeyond the expiration of the financial year in which the Proclamation ceases to\noperate, all or any of the provisions relating to the division of the taxes\nbetween the Union and the States and grants-in-aid shall be suspended [Article\n354]. In the result, if any such order is made by the President, the States\nwill be left to their narrow resources from the revenues under the State List,\nwithout any augmentation by contribution from the Union.<\/p>\n\n\n\n

(b) While a Proclamation of Financial Emergency\n[Article 360(1)] is made by the President, it shall be competent for the Union\nto give directions to the States\u2014<\/p>\n\n\n\n

(i) to observe such canons of financial\npropriety and other safeguards as may be specified in the directions;<\/p>\n\n\n\n

(ii) to reduce the salaries and allowances of\nall persons serving in connection with the affairs of the State, including High\nCourt Judges;<\/p>\n\n\n\n

(iii) to reserve for the consideration of the\nPresident all money and financial Bills, after they are passed by the\nLegislature of the State [Article 360].<\/p>\n\n\n\n

Financial relations between the Union and the States, especially in a developing economy, cannot remain static
for long. Adjustments will have to be made in the light of the changing pattern of the economy. Legislative enactments on taxation cannot be made for all times to come. After all, the relationship between the Central Government and the States in a federal system is a dynamic one; and the problems arising out of this relationship cannot be solved once for all any more than the problems of life itself. Following the \u201cautonomy\u201d demand by Jammu & Kashmir Government, the Centre may consider devolution of more financial resources to the State as well as to other States.\u00a0 <\/p>\n","protected":false},"excerpt":{"rendered":"

Financial Relations Between The Union And The States No other federal constitution makes such elaborate provisions as the Constitution of India in respect to the relationship between the Union and the States in the financial field. In fact, by providing for the establishment of a Finance Commission (Article 280) for the purpose of allocating and […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3],"tags":[],"_links":{"self":[{"href":"https:\/\/www.competitionreview.in\/blogs\/wp-json\/wp\/v2\/posts\/495"}],"collection":[{"href":"https:\/\/www.competitionreview.in\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.competitionreview.in\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.competitionreview.in\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.competitionreview.in\/blogs\/wp-json\/wp\/v2\/comments?post=495"}],"version-history":[{"count":2,"href":"https:\/\/www.competitionreview.in\/blogs\/wp-json\/wp\/v2\/posts\/495\/revisions"}],"predecessor-version":[{"id":497,"href":"https:\/\/www.competitionreview.in\/blogs\/wp-json\/wp\/v2\/posts\/495\/revisions\/497"}],"wp:attachment":[{"href":"https:\/\/www.competitionreview.in\/blogs\/wp-json\/wp\/v2\/media?parent=495"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.competitionreview.in\/blogs\/wp-json\/wp\/v2\/categories?post=495"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.competitionreview.in\/blogs\/wp-json\/wp\/v2\/tags?post=495"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}