Chapter Info (Click Here)
Book No. – 006 (Indian Polity)
Book Name – Introduction to the Indian Constitution (D.D. Basu)
What’s Inside the Chapter? (After Subscription)
1. Financial Resources in the Indian Federation
2. Legislative Power and Taxation
3. Addressing Financial Needs of the States
4. Non-Tax Revenue Sources
5. Finance Commission of India
6. Composition of the Finance Commission
7. Duties of the Finance Commission
8. Historical Overview of Finance Commissions
9. Safeguarding State Interests in Union Taxes
10. Financial Relations During Emergencies
11. Borrowing Powers
12. Demand for Greater Financial Powers
13. Goods and Services Tax (GST)
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Distribution of Financial Powers
Chapter – 25
Financial Resources in the Indian Federation
No system of federation can function successfully unless both the Union and the States possess adequate financial resources to discharge their respective constitutional responsibilities. To achieve this objective, the Constitution of India provides an elaborate framework for the distribution of taxes, non-tax revenues, borrowing powers, and grants-in-aid by the Union to the States.
The primary aim of this framework is the equitable distribution of financial resources between the Union and the States, rather than creating two watertight compartments as seen in typical federal systems. The Supreme Court of India has highlighted this principle, emphasizing that:
Sources of revenue allocated to the Union are not meant entirely for Union purposes but are distributed according to Parliamentary legislation.
Taxes and duties levied by the Union may form part of the Consolidated Fund of the States or be used to supplement State revenues based on their needs.
The Finance Commission, a high-powered and responsible body, decides the distribution of taxes and grants-in-aid in an objective manner.
The Constitution acknowledges the financial limitations of States and empowers Parliament to allocate portions of Union revenues for the welfare activities of the States. This reflects the understanding that the Union and the States together form an organic whole for resource utilization across India.
Legislative Power and Taxation
The Constitution differentiates between:
Legislative power to levy a tax
Power to appropriate the proceeds of a tax
These powers are not identical.
Division of Legislative Power:
Union and State Legislative Lists in Schedule VII determine which Legislature can levy specific taxes.
Example:
State Legislature: estate duty on agricultural land (Entry 48, List II), tax on agricultural income (Entry 46, List II).
Parliament: estate duty on non-agricultural land (Entry 87, List I), income-tax on non-agricultural income (Entry 82, List I).
Residuary taxation power belongs to Parliament (Entry 97, List I) and covers Gift Tax and Expenditure Tax.
There is no concurrent legislative power in taxation.
Constitutional Limitations on State Tax Powers:
Professional tax: Limited to Rs 2,500 per person per annum (Article 276(2)).
Sales and purchase taxes:
States cannot tax sales outside the State or in the course of import/export (Article 286).
Taxes on inter-State trade or goods declared of special importance are restricted.
Electricity consumption: States cannot tax electricity used by Government of India or for railway construction/operation (Article 287).
Property immunity:
Union property exempt from State taxes (Article 285).
State property exempt from Union taxes, except for trade/business not incidental to government functions (Article 289).