Centre-State Financial Relations
The Indian Constitution has made elaborate provisions regarding the distribution of taxes between the Centre and the States. The principle that has been followed in deciding this division is that taxes likely to have an effect upon the economic life of the country as a whole are levied by the Centre while taxes that have no effect in States other than the ones from which they are collected are levied by the States. However, since resources of the Central government yield a substantial surplus, while State governments experience heavy deficits, a mechanism of transfer of resources from the Centre to the States has been provided.
In addition to this, Article 275 of the Constitution provides for grants-in-aid to the States in need of assistance. Different sums can be fixed for different States so that the weaker States can be given specific assistance to meet the necessary expenditure. Article 282 provides for grants by the Union government to the State governments for any public purpose.
Under article 275 grants-in-aid are fixed on the advice of the Finance Commission, while under Article 282 grants can be fixed by the Central government at its own discretion. The State governments also borrow from the Centre to carry out the various developmental and rehabilitation programmes. Thus the transfer of resources from the Centre to State governments can be considered under three heads.
Resources Transferred From Centre To States
Resources transferred from the Centre to the States have increased continuously during the planning period. In fact, resources transferred during each plan in nominal terms were twice or more as compared to the previous plan. The share of these transfers in the aggregate expenditure of the State governments has varied between 35 per cent and 45 per cent.
Transfer Through The Finance Commissions
Before the question of the division of taxes and duties arises, it is necessary to determine the basis of division and the amount that should be divided. The Indian Constitution recognized that due to changing needs and circumstances it might become necessary to change the criteria and amount of division between the two levels of government (Central and State) from time to time. Hence it did not lay down any hard and fast rules in this regard. Instead, it provided for the appointment of a Finance Commission at the expiry of every fifth year or earlier, if necessary, to investigate these questions. The Commission is appointed under Article 280 of the Constitution and is entrusted with the task of recommending :
(i) the distribution between the Union and the States of the proceeds of taxes which are to be, divided between them and the allocation between the States of the net proceeds of taxes which are to be, or maybe, divided between them and the allocation between the states of the respective shares of such proceeds; (ii) the principles which should govern the grants-in-aid of the revenue of the States out of the Consolidated Fund of India; and (ii) any other matter referred to the Commission by the President in the interests of sound finance, Thirteen Finance Commissions have submitted their reports so far. The Thirteenth Finance Commission was appointed with Vijay. L. Kelkar as Chairman on November 13, 2007. It submitted its Report at end-December 2009 covering the five year period 2010-2015. The Finance Commissions have concerned themselves with allocating net proceeds of Union taxes and duties, grants-in-aid in place of jute export duty (an issue that concerned the first two Commissions only), taxes on railway fares and freights ( levied for the first time in 1957), and grants-in-aid to fill in the budgetary gaps of the States. In addition, some Finance Commission gave grants for the up-gradation of standards of administration.
Distribution of Tax Resources
Until the Tenth Finance Commission in its Final Report suggested a new devolution formula the main taxes shared between the Centre and the State governments were the income tax and the Union excise duties.
Income Tax
The share of the States in the net proceeds of income tax has varied from 55 per cent as under the First Finance Commission to 85 per cent as under the Seventh, Eighth and Ninth Finance Commissions as Table shows. The Tenth Finance Commission recommended that the shareable proceeds of income tax are to be – distributed among the states in the following manner. Sistemas de internet straight ✓ 20 per cent on the basis of the population of 1971.
Union Excise Duties
The Tenth Finance Commission has raised the share of States from 45 per cent as under the awards of the Eighth Commission and Ninth Commission to 47.5 per cent. Of the 47.5 per cent share of the Union excise duties assigned to the States, the Commission has set apart 7.5 per cent for ‘deficit’ States. For the distribution of 40 per cent of the net proceeds of Union excise duties, the Tenth Finance Commission has used the same set of criteria as used for determining the share of different states in the shareable proceeds of income tax, i.e.
i) 20 per cent on the basis of the population of 1971;
ii) 60 per cent based on distance of per capita income of State from the State with the highest per capita income (i.e. Punjab);
iii) 5 per a cent based on area of a State;
(iv), 5 per cent based on the index of infrastructure;
v) 10 per cent based on tax efforts made by the States.