6. Financial Relations Between Centre and State

WHAT

Generally, in a typical federation along with the distribution of legislative and administrative powers, the financial resources of the country are also distributed to ensure the financial independence of the units. However, the Indian Constitution does not make a clear cut distribution of the financial resources and leaves much to be decided by the Central Government from time to time. The financial resources which have been placed at the disposal of the state are so meager that they have to look up to the Union Government for subsidies and contributions. 

HOW

Taxes Exclusively Assigned to the Union

• Income from certain subjects like customs and export duties, income tax, excise duty on tobacco, jute,’ cotton, etc., 

• Corporation tax, taxes on the capital value of assets of individuals and companies 

• Estate duty and succession duty in respect of the property and other than agricultural land  

• Income from the earning departments like the railways and postal departments have been exclusively assigned to the Union Government by the Constitution.

Taxes Exclusively Assigned to States

• Income from land revenue, stamp duty except on documents included in the Union List

• Succession duty and Estate duty in respect of agricultural land; 

• Income tax on agricultural lands 

• Taxes on goods and passengers carried by road or inland water 

• Taxes on vehicles used on roads, animals, boats, taxes on the consumption or sale of electricity, tolls, taxes on lands and buildings

• Taxes on professions, traders, calling and employment 

• Duties on alcoholic liquors for human consumption, Opium, Indian hemp, and other Narcotic drugs 

• Taxes on the entry of goods into local areas 

• Taxes on luxuries, entertainments, amusements, betting and gambling etc., have been assigned to the States.

Taxes Levied by Union but Collected and Appropriated by the State

The taxes on the following items are levied by the Union Government but the actual revenue from them is collected and appropriated by the States

 (i) stamp duties on bills of exchange, cheques, promissory notes, bills of landing, letters of credit, policies of insurance, transfer of shares, etc.; 

(ii) Excise duties on medicinal toilet preparation containing alcohol or opium or Indian hemp or other narcotic drugs. 

“Toilet preparation" means any preparation which is intended for use in the toilet of the human body or in perfuming apparel of any description, or any substance intended to cleanse, improve or alter the complexion, skin, hair or teeth, and includes deodorants and perfumes.

Taxes Levied and Collected by the Union but assigned to States

The taxes in this category are levied and collected by the Union Government although they are subsequently handed over to the states from where they have been collected. Such taxes included 

• Duties in respect of succession to property other than agricultural land; 

• State duty in respect of property other than agricultural land terminal taxes on goods or passengers carried by railways, sea or air, taxes on railway freights and fares

• Taxes other than stamp duties on transactions in stock exchanges and futures markets

• Taxes on the sale or purchase of newspapers and advertisements published therein 

• Taxes on purchase or sale of goods other than newspapers where such sale or purchases take place in the course of interstate trade or commerce

Taxes Levied and Collected by the Union but Shared

Taxes on income other than agricultural income and excise duties other than those on medicinal and toilet preparations are levied and collected by the Union Government but shared with the states on an equitable basis. The basis of distribution is determined by the Parliament through a law.