No other federal Constitution makes such elaborate provisions as the Constitution of India with 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 for the purpose of allocating and adjusting the receipts from certain sources, the Constitution has made an original contribution in this extremely complicated aspect of federal relationship.
The significance of this provision becomes evident when one takes into account the unending conflicts between the federation and the units in the financial field that characterise the working of the older federations. Often the federation and the units have tried to raise revenue by taxing the same sources such as income-tax.
In theory it may look alright. But in practice it created great inconveniences. The federation thought that the States stood in its way of enhanced taxation while the States looked upon the federation as a hindrance to their financial soundness.
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At the same time, the people thought that they were subjected to double or excessive taxation. There was a constant challenge by the States to the authority of the federation to impose a particular tax. At the same time, the federation too resorted to the same process against the States.
Individual citizens too challenged the authority of either the federation or the States so as to suit their interests. The result was an enormous amount of litigation. The courts tried to solve the problem by propounding new doctrines of interpretation.
The doctrine of Immunity of Instrumentalities as propounded by the Supreme Court of the United States is an example in point.
The Government of India Act, 1935, had attempted a solution of the problem by a better device. To avoid all confusion, it tried to allocate every possible source of taxation either to the Centre of the Provinces.
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In some cases, the Centre was allowed to levy and collect the tax but distribute the proceeds to the Provinces. But the real drawback of the Act of 1935 was the extremely limited revenue resources of the Provinces.
The makers of the present Constitution, while following the same system as obtained under the 1935 Act, wanted to avoid the repetition of its defect. As a result, the Constitution lays down a broad scheme for the distribution of revenue resources between the Union and the States.
Bull it left the task of detailed allocation to the Financial Commission to be set up by the President within two years after the inauguration of the Constitution.
The basic principles that guide the allocation of resources between the federation and the units are efficiency, adequacy and suitability. It is indeed difficult to achieve all the three ends at the same time.
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Constitutional, natural and economic considerations often stand in the way. Even if a certain system might suggest itself as the most acceptable, it would not satisfy the claims and counter-claims of the various States.
Hence, the Constitution has attempted a compromise. According to this, the subject is divided into two parts, namely, (1) the allocation of revenues between the Union and the States, and (2) the distribution of grants-in-aid. The following list will show the respective sources of revenue for the Union and the States:-
(I) Union Sources
1. Corporation tax.
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2. Currency, coinage and legal tender; foreign exchange
3. Duties of customs including export duties.
4. Duties of excise on tobacco and certain goods manufactured or produced in India.
5. Estate duty in respect of property other than agricultural land
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6. Fees in respect of any of the matters in the Union List, but not including any fees taken in any court.
7. Foreign Loans.
8. Lotteries organised by the Government of India or the Government of a State.
9. Post Office Savings Bank.
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10. Posts and Telegraphs; Telephones, Wireless Broadcasting and other like forms of communication.
11. Property of the Union.
12. Public Debt of the Union.
13. Railways.
14. Rates of stamp duty in respect of Bills of Exchange, Cheques, Promissory Notes, etc.
15. Reserve Bank of India.
16. Taxes on income other than agricultural income.
17. Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies.
18. Taxes other than stamp duties on transactions in stock exchanges and future markets.
19. Taxes on the sale or purchase of newspapers and on advertisements published therein.
20. Terminal taxes on goods or passengers, carried by railways, sea or air.
(II) State Sources
1. Capitation taxes.
2. Duties in respect of succession to agricultural land.
3. Duties of excise on certain goods produced or manufactured in the States, such as, alcoholic liquids, opium, etc.
4. Estate duty in respect of agricultural land.
5. Fees in respect or any of the matters in the State List> but not including fees taken in any court.
6. Land Revenue.
7. Rates of stamp duty in respect of documents other than those specified in the Union List.
8. Taxes on agricultural income.
9. Taxes on land and buildings.
10. Taxes on mineral rights, subject to limitations imposed by Parliament relating to mineral development.
11. Taxes on the consumption or sale of electricity.
12. Taxes on the entry of goods into a local area for consumption, use of sale therein.
13. Taxes on the sale and purchase of goods other than newspapers.
14. Taxes on advertisements other than those published in newspapers.
15. Taxes on goods and passengers carried by road or on inland waterways.
16. Taxes on vehicles.
17. Taxes on animals and boats.
18. Taxes on professions, trades, callings and employments.
19. Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling.
20. Tolls.
(III) Taxes Levied and Collected By the Union But Assigned To the States (Art. 269)
1. Duties in respect of succession to property other than agricultural land.
2. Estate duty in respect of property other than agricultural land.
3. Taxes on railway fares and freights.
4. Taxes other than stamp duties on transactions in stock exchanges and future markets.
5. Taxes on the sale or purchase of newspapers and on advertisements published therein.
6. Terminal taxes on goods or passengers carried by railway, sea or air.
7. Taxes on the sale or purchase of goods other than newspapers where such sale or purchase takes place in the course of inter-State trade on commerce.
(IV) Duties Levied By the Union but Collected and Appropriated By the States (Art. 268)
Stamp duties and duties of excise on medicinal and toilet preparations (those mentioned in the Union List) shall be levied by the Government of India but shall be collected.
(i) In the case where such duties are livable within any Union territory, by the Government of India; and
(ii)In other cases, by the States within which such duties are respectively livable.
(V) Taxes Which Are Levied and Collected By the Union but Which May Be Distributed Between the Union and States
1. Taxes on income other than agricultural income.
2. Union duties of excise other than such duties of excise on medicinal and toilet preparation as are mentioned in the Union List and collected by the Government of India.
“Taxes on income” does not include corporation tax. The distribution of income-tax proceeds between the Union and the States is made on the basis of the recommendations of the Final Commission.
In spite of Article 269 and 270 which provide for the collection of taxes by the Union to be either to assigned to the States or to be shared between the Union and the States, Parliament is, under Artical 271, authorised to impose a surcharge for the purposes of the Union on all the items of tax included in Article 269 and 270. The entire proceeds of such a surcharge will form part of the Consolidated Fund of India.
Taxes on Professions, Trades, etc. (Art. 275)
Although the imposition and collection of income-tax are within the jurisdiction of the Union, the States are permitted to impose a tax on professions, trades, callings or employments. Such a tax will not be invalid on the ground that it relates to a tax on income.
Taxes on professions, etc., are generally made use of for the benefit of local self-governing institutions such as municipalities, local boards, etc. If such a tax were not allowed, an important source of income of these bodies would have come to an end, adversely affecting their already depleted sources of income. There is, however, an upper limit per annum prescribed for this tax.
Grants-in-Aid (Art. 275)
Federation is not only a unifying but also a leveling-up force. Among the constituent States of the Union are some which are developed and advanced while others are undeveloped or underdeveloped and backward.
One of the results expected of a federal Union is the opportunity that it should provide for the socially and economically backward units to better their lot. A common method adopted for this purpose is the system of the Union giving grants to the needy States.
Article 275 provides for this by empowering Parliament to pay, out of the Consolidated Fund of India, certain sums every year as grants-in-aid of the revenues of such States, to the extent that such assistance is adjudged as necessity.
The grants so fixed are based upon the recommendations of the Finance Commission. It is not necessary that every State should get grants-in-aid every year.
If, in the opinion of the Finance Commission, a particular State does not need such assistance, Parliament may leave it out while allocating such grants.
The Constitution, however, makes it obligatory for the Union Government to pay such grants-in-aid to cover the schemes of development undertaken by a State with the approval of the Union for the purpose of promoting the welfare of the Scheduled Tribes in the State or raising the level of administration of the Scheduled Areas.