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Schedule (Repealed) | 260. Jurisdiction of the Union in relation to territories | outside India |
261. Public acts, records and judicial proceedings | 262. Adjudication of disputes relating to waters of inter- | state rivers or river valleys |
263. Provisions with respect to an inter-state Council | The Constitution also draws a distinction between the power to levy | and collect a tax and the power to appropriate the proceeds of the tax |
so levied and collected. For example, the income-tax is levied and | collected by the Centre but its proceeds are distributed between the | Centre and the states. |
Further, the Constitution has placed the following restrictions on the | taxing powers of the states: | (i) A state legislature can impose taxes on professions, trades, |
callings and employments. But, the total amount of such taxes | payable by any person should not exceed ₹2,500 per annum.15 | (ii) A state legislature is prohibited from imposing a tax on the supply |
of goods or services or both in the following two cases : (a) where | such supply takes place outside the state; and (b) where such | supply takes place in the course of import or export. Further, the |
Parliament is empowered to formulate the principles for | determining when a supply of goods or services or both takes | place outside the state, or in the course of import or export16 . |
(iii) A state legislature can impose tax on the consumption or sale of | electricity. But, no tax can be imposed on the consumption or sale | of electricity which is (a) consumed by the Centre or sold to the |
Centre; or (b) consumed in the construction, maintenance or | operation of any railway by the Centre or by the concerned | railway company or sold to the Centre or the railway company for |
the same purpose. | (iv) A state legislature can impose a tax in respect of any water or | electricity stored, generated, consumed, distributed or sold by any |
should be reserved for the president’s consideration and receive | his assent. | Distribution of Tax Revenues |
The 80th Amendment Act of 2000 and the 101st Amendment Act of | 2016 have introduced major changes in the scheme of the distribution | of tax revenues between the centre and the states. |
The 80th Amendment was enacted to give effect to the | recommendations of the 10th Finance Commission. The Commission | recommended that out of the total income obtained from certain |
central taxes and duties, 29% should go to the states. This is known | as the ‘Alternative Scheme of Devolution’ and came into effect | retrospectively from April 1, 1996. This amendment has brought |
several central taxes and duties like Corporation Tax and Customs | Duties at par with Income Tax (taxes on income other than agricultural | income) as far as their constitutionally mandated sharing with the |
states is concerned.17 | The 101st Amendment has paved the way for the introduction of a | new tax regime (i.e., goods and services tax - GST) in the country. |
Accordingly, the Amendment conferred concurrent taxing powers upon | the Parliament and the State Legislatures to make laws for levying | GST on every transaction of supply of goods or services or both. The |
GST replaced a number of indirect taxes levied by the Union and the | State Governments and is intended to remove cascading effect of | taxes and provide for a common national market for goods and |
services. The Amendment provided for subsuming of various central | indirect taxes and levies such as (i) Central Excise Duty, (ii) Additional | Excise Duties, (iii) Excise Duty levied under the Medicinal and Toilet |
Preparations (Excise Duties) Act, 1955, (iv) Service Tax, (v) Additional | Customs Duty commonly known as Countervailing Duty, (vi) Special | Additional Duty of Customs, and (vii) Central Surcharges and Cesses |
so far as they related to the supply of goods and services. Similarly, | the Amendment provided for subsuming of (i) State Value Added Tax / | Sales Tax, (ii) Entertainment Tax (other than the tax levied by the local |
bodies), (iii) Central Sales Tax (levied by the Centre and collected by | the States), (iv) Octroi and Entry Tax, (v) Purchase Tax, (vi) Luxury | Tax, (vii) Taxes on lottery, betting and gambling, and (viii) State |
well as Entry 92-C in the Union List, both were dealing with service | tax. They were added earlier by the 88th Amendment Act of 2003. The | service tax was levied by the Centre but collected and appropriated by |
both the Centre and the States. | After the above two amendments (i.e., 80th Amendment and 101st | Amendment), the present position with respect to the distribution of |
tax revenues between the centre and the states is as follows: | A. Taxes Levied by the Centre but Collected and Appropriated by | the States (Article 268): This category includes the stamp duties on |
bills of exchange, cheques, promissory notes, policies of insurance, | transfer of shares and others. | The proceeds of these duties levied within any state do not form a |
part of the Consolidated Fund of India, but are assigned to that state. | B. Taxes Levied and Collected by the Centre but Assigned to the | States (Article 269): The following taxes fall under this category: |
(i) Taxes on the sale or purchase of goods (other than newspapers) | in the course of inter-state trade or commerce. | (ii) Taxes on the consignment of goods in the course of inter-state |
trade or commerce. | The net proceeds of these taxes do not form a part of the | Consolidated Fund of India. They are assigned to the concerned |
states in accordance with the principles laid down by the Parliament. | C. Levy and Collection of Goods and Services Tax in Course of | Inter-State Trade or Commerce (Article 269-A): The Goods and |
Services Tax (GST) on supplies in the course of inter-state trade or | commerce are levied and collected by the Centre. But, this tax is | divided between the Centre and the States in the manner provided by |
Parliament on the recommendations of the GST Council. Further, the | Parliament is also authorized to formulate the principles for | determining the place of supply, and when a supply of goods or |
services or both takes place in the course of inter-state trade or | commerce. | D. Taxes Levied and Collected by the Centre but Distributed |
between the Centre and the States (Article 270): This category | includes all taxes and duties referred to in the Union List except the | following: |
(i) Duties and taxes referred to in Articles 268, 269 and 269-A | (mentioned above); | (ii) Surcharge on taxes and duties referred to in Article 271 |
(mentioned below); and | (iii) Any cess levied for specific purposes. | The manner of distribution of the net proceeds of these taxes and |
duties is prescribed by the President on the recommendation of the | Finance Commission. | E. Surcharge on Certain Taxes and Duties for Purposes of the |
Centre (Article 271): The Parliament can at any time levy the | surcharges on taxes and duties referred to in Articles 269 and 270 | (mentioned above). The proceeds of such surcharges go to the Centre |
exclusively. In other words, the states have no share in these | surcharges. | However, the Goods and Services Tax (GST) is exempted from this |
surcharge. In other words, this surcharge can not be imposed on the | GST. | F. Taxes Levied and Collected and Retained by the States: These |
are the taxes belonging to the states exclusively. They are | enumerated in the state list and are 18 in number. These are18 : (i) | land revenue; (ii) taxes on agricultural income; (iii) duties in respect of |
succession to agricultural land; (iv) estate duty in respect of | agricultural land; (v) taxes on lands and buildings; (vi) taxes on | mineral rights; (vii) Duties of excise on alcoholic liquors for human |
consumption; opium, Indian hemp and other narcotic drugs and | narcotics, but not including medicinal and toilet preparations | containing alcohol or narcotics; (viii) taxes on the consumption or sale |
or electricity; (ix) taxes on the sale of petroleum crude, high speed | diesel, motor spirit (commonly known as petrol), natural gas, aviation | turbine fuel and alcoholic liquor for human consumption, but not |
including sale in the course of inter-state trade or commerce or sale in | the course of international trade or commerce of such goods; (x) taxes | on goods and passengers carried by road or inland waterways; (xi) |
taxes on vehicles; (xii) taxes on animals and boats; (xiii) tolls; (xiv) | taxes on professions, trades, callings and employments; (xv) | capitation taxes; (xvi) taxes on entertainments and amusements to the |
extent levied and collected by a Panchayat or a Municipality or a | Regional Council or a District Council; (xvii) stamp duty on documents | (except those specified in the Union List); and (xviii) fees on the |
A. The Centre | The receipts from the following form the major sources of non-tax | revenues of the Centre: (i) posts and telegraphs; (ii) railways; (iii) |
banking; (iv) broadcasting (v) coinage and currency; (vi) central public | sector enterprises; (vii) escheat and lapse;19 and (viii) others. | B. The States |
The receipts from the following form the major sources of non-tax | revenues of the states: (i) irrigation; (ii) forests; (iii) fisheries; (iv) state | public sector enterprises; (v) escheat and lapse;20 and (vi) others. |
Grants-in-Aid to the States | Besides sharing of taxes between the Centre and the states, the | Constitution provides for grants-in-aid to the states from the Central |
resources. There are two types of grants-in-aid, viz, statutory grants | and discretionary grants: | Statutory Grants |
Article 275 empowers the Parliament to make grants to the states | which are in need of financial assistance and not to every state. Also, | different sums may be fixed for different states. These sums are |
charged on the Consolidated Fund of India every year. | Apart from this general provision, the Constitution also provides for | specific grants for promoting the welfare of the scheduled tribes in a |
state or for raising the level of administration of the scheduled areas in | a state including the State of Assam. | The statutory grants under Article 275 (both general and specific) |
are given to the states on the recommendation of the Finance | Commission. | Discretionary Grants |
Article 282 empowers both the Centre and the states to make any | grants for any public purpose, even if it is not within their respective | legislative competence. Under this provision, the Centre makes grants |
to the states. | “These grants are also known as discretionary grants, the reason | being that the Centre is under no obligation to give these grants and |
some leverage to the Centre to influence and coordinate state action | to effectuate the national plan.”21 | Other Grants |
The Constitution also provided for a third type of grants-in-aid, but for | a temporary period. Thus, a provision was made for grants in lieu of | export duties on jute and jute products to the States of Assam, Bihar, |
Orissa and West Bengal. These grants were to be given for a period | of ten years from the commencement of the Constitution. These sums | were charged on the Consolidated Fund of India and were made to |
the states on the recommendation of the Finance Commission. | Goods and Services Tax Council | The smooth and efficient administration of the goods and services tax |
(GST) requires a co-operation and co-ordination between the Centre | and the States. In order to facilitate this consultation process, the | 101st Amendment Act of 2016 provided for the establishment of a |
Goods and Services Tax Council or the GST Council. | Article 279-A empowered the President to constitute a GST Council | by an order22. The Council is a joint forum of the Centre and the |
States. It is required to make recommendations to the Centre and the | States on the following matters: | (a) The taxes, cesses and surcharges levied by the Centre, the |
States and the local bodies that would get merged in GST. | (b) The goods and services that may be subjected to GST or | exempted from GST. |
(c) Model GST Laws, principles of levy, apportionment of GST levied | on supplies in the course of inter-state trade or commerce and | the principles that govern the place of supply. |
(d) The threshold limit of turnover below which goods and services | may be exempted from GST. | (e) The rates including floor rates with bands of GST. |
(f) Any special rate or rates for a specified period to raise additional | resources during any natural calamity or disaster. | Finance Commission |
It is required to make recommendations to the President on the | following matters: | • The distribution of the net proceeds of taxes to be shared |
between the Centre and the states, and the allocation between | the states, the respective shares of such proceeds. | • The principles which should govern the grants-in-aid to the states |
by the Centre (i.e., out of the Consolidated Fund of India). | • The measures needed to augment the Consolidated fund of a | state to supplement the resources of the panchayats and the |
municipalities in the state on the basis of the recommendations | made by the State Finance Commission.23 | • Any other matter referred to it by the President in the interests of |
sound finance. | Till 1960, the Commission also suggested the amounts paid to the | States of Assam, Bihar, Orissa and West Bengal in lieu of assignment |
of any share of the net proceeds in each year of export duty on jute | and jute products. | The Constitution envisages the Finance Commission as the |
balancing wheel of fiscal federalism in India. | Protection of the States’ Interest | To protect the interest of states in the financial matters, the |
Constitution lays down that the following bills can be introduced in the | Parliament only on the recommendation of the President: | • A bill which imposes or varies any tax or duty in which states are |
interested; | • A bill which varies the meaning of the expression ‘agricultural | income’ as defined for the purposes of the enactments relating to |
Indian income tax; | • A bill which affects the principles on which moneys are or may be | distributable to states; and |
• A bill which imposes any surcharge on any specified tax or duty | for the purpose of the Centre. | The expression “tax or duty in which states are interested” means: |
(a) a tax or duty the whole or part of the net proceeds whereof are | assigned to any state; or (b) a tax or duty by reference to the net | proceeds whereof sums are for the time being payable, out of the |
Consolidated Fund of India to any state. | The phrase ‘net proceeds’ means the proceeds of a tax or a duty | minus the cost of collection. The net proceeds of a tax or a duty in any |
area is to be ascertained and certified by the Comptroller and Auditor- | General of India. His certificate is final. | Borrowing by the Centre and the States |
The Constitution makes the following provisions with regard to the | borrowing powers of the Centre and the states: | • The Central government can borrow either within India or outside |
upon the security of the Consolidated Fund of India or can give | guarantees, but both within the limits fixed by the Parliament. So | far, no such law has been enacted by the Parliament. |
• Similarly, a state government can borrow within India (and not | abroad) upon the security of the Consolidated Fund of the State | or can give guarantees, but both within the limits fixed by the |
legislature of that state. | • The Central government can make loans to any state or give | guarantees in respect of loans raised by any state. Any sums |
required for the purpose of making such loans are to be charged | on the Consolidated Fund of India. | • A state cannot raise any loan without the consent of the Centre, if |
there is still outstanding any part of a loan made to the state by | the Centre or in respect of which a guarantee has been given by | the Centre. |
Inter-Governmental Tax Immunities | Like any other federal Constitution, the Indian Constitution also | contain the rule of ‘immunity from mutual taxation’ and makes the |
following provisions in this regard: | Exemption of Central Property from State Taxation | The property of Centre is exempted from all taxes imposed by a state |
or any authority within a state like municipalities, district boards, | panchayats and so on. But, the Parliament is empowered to remove | this ban. The word ‘property’ includes lands, buildings, chattels, |
shares, debts, everything that has a money value, and every kind of | property–movable or immovable and tangible or intangible. Further, | the property may be used for sovereign (like armed forces) or |
commercial purposes. | The corporations or the companies created by the Central | government are not immune from state taxation or local taxation. The |
reason is that a corporation or a company is a separate legal entity. | Exemption of State Property or Income from Central Taxation | The property and income of a state is exempted from Central taxation. |
Such income may be derived from sovereign functions or commercial | functions. But the Centre can tax the commercial operations of a state | if Parliament so provides. However, the Parliament can declare any |
particular trade or business as incidental to the ordinary functions of | the government and it would then not be taxable. | Notably, the property and income of local authorities situated within |
a state are not exempted from the Central taxation. Similarly, the | property or income of corporations and companies owned by a state | can be taxed by the Centre. |
The Supreme Court, in an advisory opinion24 (1963), held that the | immunity granted to a state in respect of Central taxation does not | extend to the duties of customs or duties of excise. In other words, the |
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