THIs PPT Presentation is an important framework through which we can understand the Financial relations between the Centre and State Gvernment

1. VINAYAK NAIR
ROLL NO. 46
BVP NEW LAW COLLEGE
LLMONEYEAR COURSE (2020 – 2021)

2. India follows a federal structure where the powers are shared between both the centre and the
states. No system of Federation can be successful unless both the union and the states have at
their disposal adequate financial resources to enable them to discharge their respective
responsibilities under the constitution . To achieve this object , Indian Constitution has made
elaborate provisions, relating to the distribution of the taxes as well as non-tax revenues. The
chief Characteristics of the scheme of financial relations are -
1. Powers between the Centre and the State;
2. Tax sharing between the two;
3. The allocation of funds to the states;
4. Check of any over-lapping and Multiple Taxation
The tax enumerated in the centre list are leviable by the centre exclusively, whereas the tax
enumerated in the state list are leviable by the state exclusively.

3. Article 268 to 281 of the Indian Constitution has made elaborate provisions that provide
directions to the centre relating to the distribution of financial resources amongst the states. It
lays down principles for the centre and states to work in coordination for levying and collection of
taxes through systematic arrangements. The provisions, for the time being, can be summarised
as follows but will be explained in detail further. It includes:
 Taxes levied by the Union but collected and kept by the States (Article 268)
 Taxes levied and collected by the Union but assigned to the States (Article 269).
 Taxes levied and distributed between the Union and the States (Article 270).
 Grant-in-aid from the Centre to the States (Article 273, Article 275 and Article 282).
 Sharing of proceeds from other taxes.
 In giving recommendations with regards to the distribution of funds between the centre and state,
the Finance commission mentioned under Article 280 plays a very important role.

4.  The 101st Amendment in the constitution and the introduction of GST in the Indian Economy
has significantly changed the landscape of financial relations between the centre and states.
Therefore, it is extremely important to have a basic knowledge of what GST is, its application and
its different forms.
 Position before GST
Before the introduction of GST, there were multiple taxes imposed by the centre and states
separately and the distribution of which was confusing and non-uniform. It included Service Tax,
Central Excise, Customs duty and State VAT etc. But after the GST, the principle of one nation
one tax was adopted.
GST is categorized into CGST, SGST or IGST depending on whether the transaction is Intrastate
or Interstate supplies. Let’s understand what does this means

5.  Article 265 : According to the provisions of this article it states that, “No tax shall be levied or
collected except by authority of law.” This basically means that the power of the centre or state
government to levy and collect tax is not absolute power; as Article 265 of the Constitution of
India imposes certain general and specific limitations on it.
 A taxing statute must also not be in violation of Article 13 of the Indian constitution i,e. it should
not lead to any infringement of fundamental rights enshrined in the constitution. Tax illegally
levied must be refunded .Doctrine of “Unjust Enrichment" must be followed.
In the case of Pratibha R.C.C. Spun, pipe and cement products V/s State of Karnataka, the
imposition of a certain tax was rejected in the light of Article 265 of the Indian Constitution. In the
instant case, a tax was charged in the pretext of a fee. Since there was no legislative enactment
behind the same, the imposition of the tax was considered illegal.

6.  Article. 266 (1): Consolidated funds of India is formed of the following –
(a). All revenue received by the Government of India / State
(b). All moneys raised by the Government of India/ State by loans ,by issue of treasury bills, loans
or ways and means advances
(c). All moneys received by the Government of India / State in the repayment of loans.
(d) No money can be appropriated except accordance with law.

7.  ARTICLE .266 (2) : Public account -
The amount of taxes ,duties and other revenues are deposited in the consolidated funds. Other
public money received by or on behalf of the appropriate government is credited to the public
account of union or the state.
 ARTICLE.267 : Contingency fund of India -
(1) empowers parliament to establish by law a contingency fund .For the union this fund is
placed at the disposal of the president by parliament by law. The amount of this fund is
determined by parliament ,by law.
(2) empowers the legislature of the State to establish by law a contingency fund we shall be at
the disposal of the Governor of the State.

8.  ARTICLE.268 : Duties levied by the union but collected and appropriated by the State –
It provides that such stamp duties as are mentioned in the Union List shall be levied by the
Government of India but shall be collected by government of India of India if they are levied
within the Union Territories and by State Government if levied within the territory of the state.
 ARTICLE. 269: Taxes levied and Collected by the Union but assigned to the States –
According to clause (1) the following duties and taxes are levied and collected by the
Government of India but are assigned to the states in the following manner provided in clause (2)
Provisions of Clause (1) are :-
a. Duties in respect of Succession to property other than agriculture land ( Entry 88);
b. Estate duty in respect of property other than agriculture land (Entry 87) ;
c. Terminal taxes on goods or passengers carried by railways, seas or air (Entry 89);
d. Taxes on railway fares and freights ( Entry 89) ;
e. Taxes other than stamp duties on transactions in stock exchanges and future markets( Entry 90)
e. Taxes on the sale or purchase of newspapers and on advertisements published ( Entry 92A);

9. f. Taxes on the sale or purchase of goods other than newspaper where such sale or purchase
takes place in the course of inter-State trade or commerce ( Entry 92A) ;
h. Taxes on the consignment of goods(whether the consignment is to the person making it or to any
other person),where such consignment takes place in the course of inter-state trade or
commerce ( Entry 92B)
It may include:-
a ) Succession Duty
b) Central SalesTax
c) Estate Duty etc
 CLAUSE (2) : This Section provides that net proceeds of any such duty or tax, except which are
Attributable to union Territories , shall not form part of the Consolidated Fund of India but shall be
assigned to state within which such duty or tax can be levied. The duty or tax shall be distributed
among such states in accordance with the principles formulated by Parliament by law.
 CLAUSE (3) : further explains that the parliament has the power to define the scope of what
constitutes the sale, purchase or consignment of goods in the course of inter-State trade or
commerce.

10.  ARTICLE. 269A. : Levy and collection of goods and services tax in course of inter-state
trade or commerce -
 CLAUSE (1) : basically involves the following aspects -
(a) Levying and collection of goods and services tax (GST).
(b) It applies in the case of inter-State trade or commerce.
(c) The tax collected shall be appropriated between the States and the Union.
(d) The Parliament has the power to lay down the law regarding the sharing of taxes collected under this
article as per the recommendations of the Goods and Services Tax (GST) Council.
 CLAUSE (5) : deals with conferring the parliament certain powers to determine the scope or to decide
the place of supply, as regards to when the supply of goods or services will constitute inter-State trade
or commerce.

11. CASE LAWS :
1) In the case of, State of Andhra Pradesh v. National Thermal Corporation Ltd., 2002 The
Supreme Court pronounced that in the purview of (Section 3 and Section 6 of Central Sales Tax
Act, 1956.) movement of goods to some other state, after completion of the transaction within the
State will not amount to inter-state trade or commerce.
Therefore, the court dealt with a very important question in this case; which defined the scope of
what will constitute inter-state trade which is explained as follows:
(a) When in the terms of the contract itself expressly or impliedly stipulates the condition regarding
the inter-State movement of goods;
(b) Further only existence of such term will not be sufficient itself rather there must be some actual
movement of goods from one State to another pursuant to such contract;
(c) The goods must be moved from one state to another and the contract of sales must conclude in
another state only

12. 2) In the case of Goodyear India Ltd. V. State of Haryana,1989, the question before the court
was to decide upon the legitimacy of two sales tax acts dealing with the consignment of goods.
The court stipulated that Section 13AA of the Bombay Sales Tax Act, 1959 and Section 9(1)
(b) of the Haryana General Sales Tax Act, 1973 prescribing rules regarding the tax on
consignment goods were beyond the scope of power of respective State Legislatures.
As the power to tax inter-state trade rests only with the Parliament, hence the aforementioned
sections were held invalid in the eyes of law.
 Further in Inter-state commerce and trade i.e. Central tax collected goes to the consumer state.
This can be easily understood with the help of the following example.
For instance, if there is a jute bag manufactured in West Bengal and it is then exported to Orissa.
As the goods involved here are transported from one state to another. Thus, IGST will be applied.
We are also aware that, in IGST both the centre and state have their own share. As in the present
case, West Bengal is the producing state and Orissa is the consuming state thus, the share of
IGST will go to Orissa.

13. Article 270- Taxes levied and distributed between the Union and the States :-
Article 270 of the Indian Constitution basically deals with the subject of how the taxes are levied and
distributed between the Union and the states.
It lays down the procedure of the appropriation for certain taxes i.e. all the taxes except those
mentioned under Article 268, 269 and 269A and any surcharge on taxes and duties mentioned in
Article 271 or, any cess levied for a specific purpose, other than these the provision holds true for
every other tax.
1) These taxes are levied and collected by the Union.
2) The tax shall be distributed between the States and the Central Government.
3) It may include taxes such as:
 Excise Duty on Non-GST products
 Income Tax
 Basic Customs Duty etc.

14.  The 101st Amendment inserted two new subclauses Article 270(1A) and Article270(1B) under
this article. It basically lays down how the scope of the tax to be distributed between Centre and
State has been modified after the introduction of GST.
 Sub-clause 270(1A)
As per this Sub-clause, tax collected by the Central Government under clause (1) of Article 246A
of the Indian Constitution will also be distributed between the centre and the state as per the
method provided under Article 270(2).
Artical.246A(1): In simpler terms, it can be said that clause (1) Article 246A of the Indian
constitution empowers both the Parliament and State Legislature to make laws with respect to
the goods and services tax when the trade is happening within the state i.e. Intra-State.
Hence, this Sub-clause when read along with Article 270(1A), implies that the taxes collected
under Article 246A(1) shall also be distributed between the states and the Union.
 Sub-clause 270(1B)
According to Sub-clause 270(1B), the following taxes collected by the Central government will
also be distributed between Centre and States.The amount apportioned to the Central
government in IGST shall also be distributed to the states i.e. the central portion in IGST. It is the
tax collected by the Central Government under clause (1) of Article 269.
Taxes collected under IGST which has been used for payment of CGST.

15.  Clause (2) of Article 270 :
This clause lays down that the central tax obtained by the government as mentioned in clause
(1) shall be distributed between the states as per the time and manner provided under clause (3)
and such share will not form the part of the consolidated fund of India.
 Clause (3) of Article 270 :
According this clause,central taxes formed in one central pool shall be distributed in the manner
prescribed by the President of India as per the recommendations of the Finance Commission.
Latest Fact: For the operational period of 2015-2020, the share of the states in the net proceeds
of the Union tax revenue was 42%.

16. CASE LAW:-
1) In the case of T.M. Kanniyan v. Income Tax Officer, Pondicherry,1967, the Supreme Court
held that Income tax as per the application of Article 270 forms a part of the consolidated fund of
India. Further, the court opined that it is not necessary to distribute income tax to Union territories
which are centrally administered by the President.
The court also stipulated that the purpose behind Article 270 is to ensure equitable distribution of
the financial resources between the Centre and the State.
Article: 275 : Grants from the Union to certain States :-
It provides that such sums as parliament may by law provide shall be charged on the consolidated
Fund of India in each year as grants-in-aid of revenue of such states as Parliament may determine to
Be in need of assistance. Different sums may be fixed for different states. Principles on which
Grants-in-aid are given are determined by the Finance Commission of India.

17.  Article 276- Taxes on professions, trades, callings and employments
Article 276 empowers a state or other local authority to impose taxes on professions and trades. But the
total amount payable under any such tax shall not exceed two thousand and five hundred rupees per
annum. Earlier this limit was up to two fifty rupees only and was raised after the recommendations of the
Sarkaria Committee in 1988.
CASE LAWS:
1) Tax levied if exceeded the permissible limit
In the case of Commissioner, Quilon vs M/S. Harrisons & Crosfield Ltd,1964, the Kerala
Government imposed Kerala Profession Tax, 1958 which was held ultra vires by the Supreme Court of
India. As the Kerala legislature was incompetent to impose a tax exceeding the permissible limit. Thus,
being violative of Article 276 was held unconstitutional accordingly.
2) The overlapping situation with Union List
In the Case of B.M. Lakhani v. Municipal Committee,1970, two important observations were made by
the Supreme Court that are as follows:
(a) The suit for refund of money paid in excess than the amount prescribed under Article 276 is
maintainable in law.
(b) Though there is a limitation or cap on the amount of tax to be levied but no such bar exists on the
exercise of this power by the state or local bodies. Further despite the fact that the subject of
income tax is mentioned in the Union list. But the Constitution allows such overlapping under
Article 276.

18.  Article 277 : Savings :-
Except for cesses, fees, duties or taxes which were levied immediately before the
commencement of the constitution by any municipality or other local body for the purposes of the
State, despite being mentioned in the Union List can continue to be levied and applied for the
same purposes until a new law contradicting it has been passed by the parliament.
CASE LAW:
 In the case Hyderabad Chemical and Pharmaceutical Works Ltd. v. State of Andhra
Pradesh, the appellant was manufacturing medicines for making which they had to use alcohol,
the licenses for which were procured under the Hyderabad Abkari Act and had to pay some fees
to the State Government for the supervision. But the parliament passed the Medicinal and Toilet
Preparations Act, 1955 under which no fee had to be paid .The petitioner challenged the levy of
taxes by the state after the passing of the Medicinal and Toilet Preparations Act, 1955 because
according to Article 277, entry 84 of list 1 in the 7th schedule, the state could not levy any fee.
The difference between tax and fee was explained. Proceeds from tax collection are used for the
benefit of all the taxpayers but a fee collected ( by the State)is used only for a specific purpose
(special benefits) .

19.  Article 279:Calculation of “net proceeds”
This article basically defines the net proceeds of a tax. As per clause (1) of this article, all the
earnings from the taxes excluding the cost of the collection will constitute the net proceeds of
India. Further, it provides that the net proceeds of a tax or duty, in whole or in part or of any area
will be certified by the Comptroller and the Auditor General of India and the decision of the CAG
shall be final subject to conditions mentioned under clause (2) of the Article.
 Article 279 A- GST Council:-
Article 279A empowers the president of India to constitute a Council named Goods and
Services Tax Council (GST Council) within 60 days after the commencement of the 101st
Constitution Amendment Act, 2016.
 Objective
It shall seek to ensure a uniform system of GST to avoid any conflict or confusion, and the
development of a harmonized national market for goods and services.

20.  Composition of GST Council
The members of the council will be as follows:
1) The Union Finance Minister of India will serve as the chairperson of this council.
2) The respective states will nominate the State Finance Ministers/ or any other Minister as the
member of the council.
3) The Union Minister of State in charge of revenue or finance will also be a member of this
council.
4) The representatives of the states shall choose amongst themselves one “Vice-president”.
 Quorum and powers
The council shall meet from which one half of its member will constitute a quorum, which will
have the power to make decisions on the following listed matters:
1) Threshold exemption limit i,e. the turnover below which goods and services will be exempted from
GST.
2) Rate of GST to be levied, and special provisions with respect to the states of Arunachal Pradesh,
Jammu and Kashmir, Assam, Meghalaya, Manipur, Nagaland, Mizoram, Sikkim, Tripura,
Himachal Pradesh and Uttarakhand, categorised as special-category states.
3) Laws on the model of GST, rules for determining Inter-state supply transactions and determining
the place of supply or any other matter.

21. Further, the GST Council is also empowered to establish a mechanism to adjudicate any dispute
between the Centre and the States or between any States.
 Process of Decision-making
The decision shall be taken by at least three- fourth majority out of which:
1) The vote of the Central Government will have one-third of the weightage.
2) The vote of all the State Governments shall account for two-third of weightage.
 Process of Ratification
Article 368 of the Indian Constitution has been amended to include Article 279 A within its ambit.
It basically implies that to bring any amendments or modification to Article 279 A, ratification by a
two-thirds majority of both the houses and half of the state legislatures will be required.

22. Article 280: Finance Commision :
This Article of the Indian Constitution is a very important article as it deals with the Finance Commission
of India. It lays down the composition, power and functions of the finance commission. The idea of the
finance committee has been borrowed from the Common-wealth Commission of Australia.
 As per Article 280, the President has the power to set up a Finance Commission after a period of every
five years. The Finance Commission will assist the President by making recommendations to him
regarding the distribution of net proceeds of taxes to be divided between the centre and the states.
 Object
The object of setting up the Finance Commission is to ensure an equitable distribution of funds between
the Centre and state so that neither there is any impairment to the autonomy of States nor to limit the
revenue resources of the Centre.
 Constitution of Finance Commission
The composition of Finance Commission is mentioned under the Finance Commission Act, 1951 which
when read with provisions of Article 280 lays down that the Commission basically consists of five
members out of which there will be one Chairman, as appointed by the President of India. The criteria
for selection of the Chairman is that he/she should have a special understanding of public affairs while
the members shall possess the following qualifications:
.

23. 1) He/she may be either a judge of a HighCourt or qualified enough to be appointed so.
2) He/She must have deep knowledge of the finance and accounts of the Government.
3) He/She must be experienced in the field of financial matters and in administration; or
4) He/ She must have a special understanding of economics
 Functions of the FinanceCommission
The FinanceCommission has the following functions which involve recommending the President
regarding :-
1) The distribution of the net proceeds between the Union and the States and allocation of such proceeds
between different States.
2) To lay down guidelines concerning the grants-in-aid of the revenue of the states out of theConsolidated
Fund of India.
3) The suggestions on augmentation of the consolidated Fund of a state to supplement the resources of
the Panchayats and Municipalities in the State.
4) Any other matter in the interest of sound finance.
 Powers of the Finance Commission
The FinanceCommission has all the powers of a civil court conferring it with a power to summon the
witnesses, requiring any person to furnish any information, production of documents or any point that
the Commission regards relevant or useful.

24. After the implementation of the GST which is an all-inclusive indirect tax, the process has become
smoother and helped prevent the disastrous effect it had earlier. TheConstitution of India has provisions
with respect to the distribution of financial resources under chapter two of part twelfth which is in
rhythm with the Federal, State and Concurrent list under 7th Schedule(i.e. borrowing).To sum up, the
Parliament rights are not bound and the IndianConstitution gives wide powers to the Parliament and it
is neither rigid nor the same. So, according to future needs, there are provisions that can change the said
rules of law. Paying taxes may not be the best task, however, it pays for all the development and
infrastructure that one enjoys.
However, the future seems bright as the FinanceCommission has always been very liberal and receptive
to the demands of the states and giving recommendations on the distribution of taxes and other
financial concerns like state borrowings and State debts etc. Moreover, the efforts of the Central
Government in bringingGST and establishment of the GST council are appreciable as it brought much
more clarity and uniformity in the taxation.This essentially will lead to an increase in the revenues in the
long run.We can finally conclude by saying that all these loopholes in the federal structure can be easily
solved, if both the Centre and State Governments show a higher degree of cooperation, putting in
sincere efforts to work in harmony keeping their political motives aside.