Financial relations between the Centre and States - Economics, UPSC, IAS. | Indian Economy (Prelims) by Shahid Ali PDF Download

Financial relations between the Centre and States

Financial relations between the Centre and States

The financial relations between the Union Government and the States are discussed in Article 268 to 281 of the Constitution of India.

List-I of Schedule VII of the Constitution enlists the Union taxes which are as follow:

1. Income tax other than agriculture tax
2. Corporation tax
3. Custom duties
4. Excise duties except on alcoholic liquors and narcotics
5. Estate and succession duties other than on agricultural land
6. Taxes on capital value of assets except agricultural land of individuals and companies
7. Rates of stamp duties on financial documents
8. Taxes on sales or purchase of newspapers and on advertisements therein
9. Taxes on Railway fright and fares
10. Terminal taxes on goods or passengers carried by railways, sea or air
11. Taxes on the sale and purchase of goods in the course of inter-state trade

List-II of VII Schedule enlists the taxes which are within the jurisdiction of the states:

1. Land revenue
2. Taxes on the sale & purchase of goods, except newspapers
3. Taxes on agricultural income
4. Taxes on land and buildings
5. Succession and estate duties on agricultural land
6. Excise on alcoholic liquors and narcotics
7. Taxes on the entry of goods into a local area
8. Taxes on the sale and consumption of electricity
9. Taxes on mineral rights
10. Taxes on vehicles, animals and boats
11. Taxes on luxuries including entertainment, gambling
12. Tolls
13. Taxes on professionals, trades and employment
14. Capitation taxation
15. Tax on advertisements other than those contained in newspapers

Besides constitution has provided for the revenues for certain taxes on the union list to be allotted, partly or wholly to the states. These provisions are as follow:

(i) Duties levied by the Union but collected and appropriated by the States

They include stamp duties, excise duties on medical preparations containing alcohol or narcotics

(ii) Taxes levied and collected by the Union but assigned to the States

These include:

1. Duties in respect of succession to property other than agricultural land.
2. Estate duty in respect to property other than agricultural land.
3. Terminal taxes on goods or passengers carried by railway, sea or air.
4. Taxes on railway fares and freights.
5. Taxes other than stamp duties on transactions in stock exchanges and future markets.
6. Taxes on the sale or purchase of newspapers and on advertisements published therein.

(iii) Taxes levied and collected by the Union and distributed between the Union and the States

These include income tax and union excise duties

FINANCE COMMISSION [ARTICLE 280]

The commission has to be constituted by the president every five year. The chairman must be a person having experience in public affairs and the other four members must be appointed from amongst the following:-

1. A high court judge of one qualified to appointed as such.
2. A person having special knowledge of the finances and accounts of the government.
3. A person having wide experience in financial matters and administration.
4. A person having special knowledge of economics.

FUNCTIONS

It shall be the duty of the commission to make recommendations to the president as to-

i.The distribution of net proceeds of taxes between the union and states.

ii.The principles which would given the grant in aid of the revenue of the state out of CFI. iii. The measures needed to augment the CFS to supplement the resources or the

Panchayats and municipalities in the state.

iv.Any other matter referred to the commission by the president in the interest of sound finance.

Article 281 lays down the duty imposed on president to lay the recommendation of the commission before each house of parliament

Major Recommendations of 13th Finance Commission

About Ddevolution

• The share of states in the net proceeds of the shareable Central taxes should be 32%.This is 1.5% higher than the recommendation of 12th Finance Commission.
• Total transfer to states on the revenue account be capped at 39.5% of the centre’s gross tax revenue, compared to 37.5%

About fiscal correction

• Revenue deficit to be progressively reduced and eliminated, followed by revenue surplus by 2013-14.
• Fiscal deficit to be reduced to 3% of the GDP by 2014-15.
• A target of 68% of GDP for the combined debt of centre and states.
• The Medium Term Fiscal Plan (MTFP) should be reformed and made the statement of commitment rather than a statement of intent.

• FRBM Act need to be amended to mention the nature of shocks which shall require targets relaxation.

About Goods & services tax

• Single rate for goods, services proposed.
• To make, GST purely consumption based, taxes and cesses should be subsumed.
• Petrol, Diesel, alcohol, tobacco may be charged to GST with the additional levies by the centre and states.
• Only public services, unprocessed food items, health, education and transactions between employer and employee be exempted.