Centre State Relations

The Indian Constitution, being federal in structure, divides all powers-legislative, executive and financial between the centre and the states. However, the Constitution of India has established an integrated judicial system to enforce both the Central laws as well as state laws. Hence, there is no division of judicial power in the Indian federal system.

Though the Centre and the states are supreme in their respective fields, maximum harmony and coordination between the centre and state is essential for the effective operation of the federal system. Hence, the constitution incorporates several provisions to ensure this.

The Centre and state relations can be studied under the following three categories:

• Legislative relations
• Administrative relations
• Financial relations

The relations between the Centre and the states which constitute the core of federalism have been enumerated in Parts XI and XII of the Constitution under the heads, legislative, administrative and financial relations.

Legislative Relations

The legislative relations between the Centre and the states are described in Part XI of the Constitution in Articles 245 to 255. Besides these, there are some other articles dealing with the same subject. The Constitution of India divides the legislative powers between the Centre and the states with respect to both the territory and the subject of legislation, like any other Federal Constitution. The legislative relations between the union and states are divided into four categories:

• Territorial extent of central and state legislation
• Distribution of legislative subjects
• Parliamentary legislation in the state field
• Centre’s control over state legislation

I. Territorial Extent of Central and State Legislation

The Constitution of India defines the territorial limits of the legislative powers vested in the Centre and the states in the following way:

• The Parliament can make law for the whole or any part of the territory of India. Here territory of India includes the states, the union territories.
• The state legislature can make laws that apply to the entire state or only a portion of it. State laws are not applicable outside of the state, except when there is a sufficient relation between the state and object.
• Only Parliament has the authority to enact “extraterritorial legislation”. Thus, the law of the Parliament is also applicable to the Indian citizens and their property in any part of the world.
• The 101st Constitution Amendment Act, 2016 makes provision that Parliament has exclusive power to make laws with respect to goods and services tax (GST). The goods and services tax applies to the supply of goods or of services, or both, that takes place in the course of inter-state trade or commerce.

Though the Indian Constitution places certain restrictions on the plenary territorial jurisdiction of Parliament, In other words, the laws of Parliament are not applicable in the following areas:

•   For the peace, progress, and good government of the five Union Territories, the President can make regulations which have the same effect as those made by parliament. These Union Territories are Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli, Daman and Diu and Ladakh. It may also amend or repeal any act of Parliament in relation to these union territories.
•   The governor has the authority to order that an act of parliament does not apply to a scheduled area in the state or apply with specified modifications and exceptions.
• The Governor of Assam is empowered to direct that an act of Parliament does not apply to a tribal area in the state or apply with specified modification and exceptions. The President enjoys the same power with respect to tribal areas in Meghalaya, Tripura and Mizoram.

II. Distribution of Legislative Subjects

The Constitution of India divides the legislative subjects into three categories between the Centre and the states in the Seventh Schedule. These categories are union list, state list, and concurrent list.

• The Parliament has powers to make laws with respect to any of the matters enumerated in the Union List. This list has at present 100 subjects (originally 97 subjects). Some of the important subjects included in this list are: defence, railways, banking, foreign affairs, custom duties, atomic energy, insurance, inter-state trade and commerce, audit, census etc.
• Under normal circumstances, the state legislature has powers to make laws with respect to any of the matters enumerated in the State List. This list has at present 61 subjects (originally 66 subjects). Some of the important subjects included in this List are trade and commerce within the State, police, fisheries, industries, public health and sanitation, markets, theatres, agriculture, gambling etc.
• Both the Parliament and state legislature can make laws with respect to any of the matters enumerated in the Concurrent List. This list has at present 52 subjects (originally 47 subjects). Some of the subjects included in this list are: electricity, newspapers, criminal law and procedure, civil procedure, marriage and divorce, population control and family planning, labour welfare, economic and social planning, etc. The 42nd Amendment Act of 1976 transferred five subjects to the Concurrent List from the State List. These subjects are education, forests, weights and measures, protection of wild animals and birds, and administration of justice; constitution and organization of all courts except the supreme court and the high courts.
• The Parliament has power to make law with respect to residuary subjects (the matters which are not enumerated in any of the three lists).

The Union list takes priority over the state list and the Concurrent list, and that of the Concurrent List takes priority over the State list. In case of conflict between central law and state law on a subject enumerated in the concurrent list, the central law prevails over the state law. However, if the state law has been reserved for the consideration of the president and has received his assent, then the state law prevails in the state. Still, parliament can override the state law by subsequently making a law on that matter.

The distribution of legislative powers between the centre and states in the Indian constitution is adopted from the Government of India Act 1935. This Act provides three lists – federal, provincial and concurrent. The present Constitution follows the scheme of this act but with one difference, that is, the residuary powers were given neither to the federal legislature nor to the provincial legislature but to the governor-general of India.

III. Parliamentary Legislation in State Field

The distribution of legislative powers between the Centre and the states is to be maintained in normal times. But the distribution of legislative powers between the Centre and the states is either modified or suspended in abnormal times. In other words, the Indian Constitution empowers the Parliament to make laws on any matter enumerated in the State List under the following five extraordinary circumstances:

• If Rajya Sabha passes a resolution on any matter in the State List which is necessary for national interest and Rajya Sabha declares that Parliament should make laws on such a matter in the State List, then the Parliament becomes competent to make laws on that matter. Such a resolution must be supported by two-thirds of the members present and voting. One year is the duration of such a resolution. A resolution like this can be renewed as many times as you like, but not for more than one year at a time. This provision does not restrict the power of a state legislature to make laws on the same matter. But if there is an inconsistency between a state law and a parliamentary law, the parliamentary law would prevail.
• When a declaration of national emergency is in effect, then the Parliament acquired the power to legislate with respect to any matters on the State List. The laws become inoperative on the expiration of six months after the emergency has ceased to operate.  Though the power of the state legislature to make laws on the same matter is not restricted. But if there is an inconsistency between a state law and a parliamentary law, the parliamentary law would prevail.
• When the two or more state legislatures pass resolutions requesting the Parliament to enact laws on a matter in the State List, then the Parliament can make laws for regulating that matter. This law only applies to those states which have passed the resolutions. If any other state wants to adopt this law afterwards by passing a resolution to that effect in its legislature. Such a law can be amended or repealed only by the Parliament and not by the legislatures of the concerned states. Some important laws passed under the above provision are Prize Competition Act, 1955; Wild Life (Protection) Act, 1972; Water (Prevention and Control of Pollution) Act, 1974; Urban Land (Ceiling and Regulation) Act, 1976; and Transplantation of Human Organs Act, 1994.
• For implementation of international treaties or agreements, the Parliament can make laws on any matter in the State List. This provision enables the Central government to fulfil its international obligations and commitments. Some important laws enacted under the above provision are the United Nations (Privileges and Immunities) Act, 1947; Geneva Convention Act, 1960; Anti-Hijacking Act, 1982.
• When the President’s rule is imposed in a state, the Parliament becomes empowered to make laws with respect to any matter in the State List in relation to that state. A law made by the Parliament continues to be operative even after the president’s rule.  This means that the period of such a law is not dependent on the president’s rule in the state. However, such a law can be repealed or altered or re-enacted by the state legislature.

IV. Centre’s Control Over State Legislation

The Constitution of India empowers the Parliament to make a law for the state legislate directly under exceptional situations. Furthermore, the Constitution also empowers the Centre to exercise control over the state’s legislative matters in the following ways:

• The Governor can reserve certain types of bills passed by the state legislature for the consideration of the president. The president enjoys an absolute veto over them.
• Bills on certain matters enumerated in the state list can be introduced in the state legislature only with prior consent of the President. For example, the bills imposing restrictions on the freedom of trade and commerce.
• During a financial emergency, the President can direct the states to reserve money bills and other financial bills passed by the state legislature for his consideration.

The legislative relations between the Centre and the state clearly indicates that the Constitution has assigned a position of superiority to the Centre in the legislative sphere.

To know about the Articles Related to Centre-State Legislative Relations, refer to the table

Problems in Legislative Relations of Centre- State-

• States like Punjab and West Bengal demanded that centre should confine itself to only four subjects – Currency, General Communication, External affairs and Defence.
• Abuse of Article 200 – assent to bills and reservation of money/finance bills for Presidents’ consideration.
• Several states sought abolition or reduction of subjects enumerated in concurrent list and transferring some of them to state list.
• Residuary powers must be rest with the state or they should be treated as concurrent items.
• Some states feared abuse of Article 249—Power of Parliament (Rajya Sabha) to legislate with respect to a matter in the State List in the national interest.

Administrative Relations

The framers of the Indian Constitution never intended to create two independents administrative between the centre and states. They intended to create an administrative relationship between the centre and states on the bases of co-operation and co-ordination. The administrative relations between the Centre and the states are described in Part XI of the Constitution in Articles 256 to 263. Besides these, there are some other articles dealing with the same subject.

Distribution of Executive Powers-

The executive power has been divided between the Centre and the state, except in a few cases. Thus, the executive power of the Centre extends to the whole of India in the matters on which Parliament has the power to make law (i.e., the subjects enumerated in the Union List). Furthermore, the executive power of the Centre has to implement the exercise of rights, authority, and jurisdiction conferred on it by any international treaty or agreement. Similarly, the executive power of the state extends to its territory in respect of matters on which the state legislature has power to make law (i.e., the subjects enumerated in the State List).

The executive power in matters relating to the concurrent list is vested in the states except when a Constitutional provision or a parliamentary law specifically confers it on the Centre. Thus, any law on a concurrent subject which is enacted by Parliament, is to be executed by the states, except when the Constitution or Parliament has directed otherwise.

Obligation of States to the Centre-

The two restrictions are placed on the executive power of the states by the Constitution of India. These restrictions impower the Centre to exercise its executive power in an unrestricted manner. Thus, the executive power of every state should be exercised in such a way as to (A) ensure compliance with the laws made by Parliament and any existing law which applies in the state; and (B) as not to impede or prejudice the exercise of the executive power of the centre in a state. Thus, the first restriction on the executive power of the state lays down a general obligation upon the state, and the second restriction on the executive power of the state imposes a specific obligation on the state not to hamper the executive power of the Centre.

If the executive power of the state has failed to abide by these two restrictions of the Constitution. In such a situation, the President’s rule can be imposed in the state under Article 356.

Centre’s Directions to the States-

The Constitution of India also empowers the Centre to give directions to the states with regard to the exercise of their executive power in the following matters:

• Construction and maintenance of communication systems by the state which is of national or military importance.
• The protection of the railway’s properties within the state.
• Provision of suitable facilities for instruction in the mother-tongue for students from linguistic minority groups at the primary level of school in the state.
• The drawing up and implementation of the specified schemes for the welfare of the Scheduled Tribes in the state.

If the executive power of the state fails to abide by these matters. In such a situation, the President’s rule can be imposed in the state under Article 356.

Mutual delegation of functions-

The distribution of legislative powers is rigid between the Centre and the states. Consequently, the Centre government cannot delegate its legislative powers to the state government, and a single state cannot request Parliament to make a law on a state subject.  The distribution of executive power in general follows the distribution of legislative powers between the Centre and the states. But such a rigid division in the distribution of executive power may lead to occasional conflicts between the Centre and the state. Hence, the Indian Constitution provides for inter-government delegation of executive functions in order to mitigate rigidity and avoid a situation of deadlock.

With the consent of the state government, the President may entrust to that state government any of the executive functions of the Centre. Conversely, the governor with the consent of the central government may delegate the executive functions of the state to the Centre. This mutual delegation of administrative functions may be conditional or unconditional.

Though the Constitution makes a provision for the entrustment of the executive functions of the Centre to a state without the consent of that state. However, in this case, the delegation is made by the Parliament rather than the president. Thus, a law made by Parliament on a subject of the Union List can confer power on the state and impose duties on the state. However, the same thing cannot be done by the state legislature.

 Thus, it is clear that the mutual delegation of functions between the Centre and the state can take place either under an agreement or by legislation. While the centre can use both the methods, a state can use only the first method.

Cooperation between the Centre and the States-

To ensure cooperation and coordination between the centre and the states, the following provisions have been incorporated by the Constitution:

• The Parliament can provide for the adjudication of any dispute or complaint with respect to the use, distribution and control of waters of any inter-state river and river valleys.
• Under Article 263, the President can establish an inter-state council to investigate and discuss subjects of common interest between the centre and the states.
• Public acts, records, and judicial processes of the centre and every state are to be granted full faith and credit throughout the territory of India.
• The Parliament can appoint an appropriate authority to carry out the purposes of the constitutional provisions relating to the interstate freedom of trade, commerce and intercourse.

All-India Services-

Like in any other federation, the Centre and the states have their own separate public services called the Central Services and the State Services, respectively, in India.  It also includes IAS, IPS, and IFS, which are all-India services.  The members of these services serve at the top of any department in both the Centre and the states and take turns serving them. But they are recruited and trained by the Centre. These services are controlled jointly by the Centre and the states. The ultimate control lies with the Central government while the immediate control vests with the state governments.

In 1947, the colonial services in India were dissolved and the Indian Civil Service (ICS) was replaced by the Indian Administrative Service (IAS) and the Indian Police (IP) was replaced by the Indian Police Service (IPS). These services were recognised as “All-India Services” by the Constitution of India. In 1966, the Indian Forest Service (IFS) was created as the third All-India service. Article 312 of the Indian constitution empowers Parliament to create new All-India Services on the basis of a Rajya Sabha resolution to that effect.

Each of these three all-India services has common rights and status and uniform scales of pay throughout the country, i.e., they form a single service irrespective of their division among different states.

Due to restricting the autonomy and patronage of the states, all-India services violate the principle of federalism under the Constitution. But they are supported on the ground that:

•  They assist in maintaining a high level of administration in both the Centre and the states.
• They assist in ensuring that the administrative system is uniform across the country.
• They facilitate liaison, cooperation, coordination and joint action on the issues of common interest between the centre and the states.

However, the Constitution provides the states with their rights to form their own civil services.

Public Service Commission-

In this field, the centre-state relations are as follows:

• The Chairman and members of the state public service commission are appointed by the governor of the state. Though, they can be removed only by the President.
• Parliament can establish a Joint State Public Service Commission (JSPSC) for two or more states when related state legislatures request it. The chairman and members of the JSPSC are appointed by the President.
• The Union Public Service Commission (UPSC) can serve the needs of the state on the request of the state governor and the approval of the President.
• The Union Public Service Commission assists the states (when requested by two or more states) in framing and operating schemes of joint recruitment for any service for which candidates possessing special qualifications are required.

Integrated Judicial System-

Although India has adopted a dual polity, there is no dual system of administration of justice. On the other hand, the Constitution established an integrated judicial system. In this system, the Supreme Court is at the top and the state high courts below it. This single system of courts enforces both the Central laws as well as the state law. This system is adopted to eliminate diversities in the remedial procedure. The Parliament can establish a common high court for two or more states. For example, Punjab and Haryana or Maharashtra and Goa have a common high court.

The judges of a state high court are appointed by the President of India in consultation with the Chief Justice of India and governor of the related state. They can also be removed or transferred by the President.

Relations During Emergencies-

• During a national emergency (under Article 352), the centre becomes entitled to give executive directions to the state on any matter. Thus, the state governments are brought under the complete control of the Centre though they are not suspended.
•   When President’s rule is imposed in the state (under Article 352), the president can assume to himself the functions of the state government and powers vested in the governor or any other executive authority in the state.
• During a financial emergency (under Article 360), the centre can order states to follow financial propriety canons, and the President can issue other essential directives, such as reducing the wages of state employees and high court judges.

Other Provisions-

The Constitution contains the following other provisions which provide the Centre to exercise control over the state administration:

• Under Article 355, two duties impose on the Centre: (A) to protect every state against external aggression and internal disturbance; and (B) to ensure that the government of every state is carried in accordance with the provisions of the constitution.
• The governor of a state is appointed by the president. He holds office at the pleasure of the President. The Governor is the Constitutional head of the state. He acts as an agent of the Centre in the state.
• The state election commissioner is appointed by the governor of the state. But he can be removed only by the President.

Non-Constitutional Advisory Bodies-

The non-constitutional advisory bodies work to promote cooperation and coordination between the Centre and the states. It includes NITI Aayog, the National Development Council, the North-Eastern Council, the Zonal Councils, the National Integration Council, the Central Council of Health, the Central Council of Indian Medicine, the Transport Development Council, the Central Family Welfare Council, the Central Council of Homoeopathy, etc.

Conference between Centre and States-

To promote cooperation and coordination between the Centre and the states, conferences are held either annually or otherwise to facilitate Centre-state consultation on a wide range of matters. Some of the important conferences are as follows:

• The Governors’ Conference (presided over by the President).
• The Chief Ministers’ Conference (presided over by the Prime Minister).
• The Chief Secretaries’ Conference (presided over by the Cabinet Secretary).
• The Conference of Inspector-Generals of Police.
• The Chief Justices’ Conference (presided over by the Chief Justice of India).
• The Home Ministers’ Conference (presided over by the Central Home Minister).
• The Law Ministers’ Conference (presided over by the Central Law Minister).
• The Conference of Vice-chancellors.

To know about the Articles Related to Centre-State Administrative Relations, refer to the table.

Major issues of Administrative Relations between Centre-State-

• Management of All India Service.
• Central administrative directions to the states.
• Binding nature of the schemes on the states.
• The Governor’s appointment, as well as his or her position and role in the
  state function.
• There is heavy abuse of Article 356 and it should be curtailed.

Financial Relations

The distribution of financial resources is especially critical in determining the nature of the state’s relationship with the Centre. Both the Union and the State have been provided with independent sources of revenue by the Constitution. The financial relations between the Centre and the states are described in Part XI of the Constitution in Articles 268 to 293. Besides these, there are some other articles dealing with the same subject. These can be understood under the following heads:

Allocation Of Taxing Powers-

The Indian Constitution divides the taxing powers between the centre and the states in the following way:

• Parliament has the exclusive power to levy taxes on subjects enumerated in the Union List.
• The state legislature has the exclusive power to levy taxes on subjects enumerated in the State List.
• No tax-related subjects are mentioned in the Concurrent List. But Goods and Service Tax was included in the Concurrent List by the 101st Constitutional Amendment Act of 2016, which is an exception for this list. This amendment provides power to both the Centre and the states for administration of Goods and Service Tax.
• The residuary power of taxation is vested in the Parliament. Under this provision, the Parliament has imposed gift tax, wealth tax and expenditure tax.

Restriction Placed by Constitution on Taxation Power of the State-

The Constitution has imposed the following restrictions on the taxing powers of the states:

• A state legislature can impose taxes on professions, trades, callings, and employment. But, the total amount payable by any person should not exceed Rs 2500 per annum.
• Taxes on the sale or purchase of products can be imposed by a state legislature (other than a newspaper). But, this power of state to impose sales tax is subjected to four restrictions: (A) No tax can be levied on sales or purchases made outside of the state; (B) No tax can be levied on the sale or purchase taking place in the course of import or export; (C) No tax can be levied on the sale or purchase taking place in the course of inter-state trade and commerce; and (D) A tax levied on the sale or purchase of goods declared by the Parliament to be of special importance in interstate trade and commerce is subject to the restrictions and conditions specified by the Parliament.
• A state legislature can levy a tax on the consumption or sale of electricity in the state. But no tax can be levied on the consumption or sale of electricity which is (A) consumed by the Centre or sold to the Centre; and (B) consumed in the construction, maintenance, or operation of any railway by the Centre or by the concerned railway company or sold to the Centre or railway company for the same purpose.
• A state legislature can levy a tax in respect of any water or electricity stored, generated, consumed, distributed or sold by any authority established by Parliament for the purpose of regulating or developing any inter-state river or river valley. But, such a law, to be effective, should be reserved for the president’s consideration and receive his assent.

Distribution Of Tax Revenues-

In the distribution of tax revenues between the centre and the states, there was a major change after the implementation of the 80th Amendment Act of 2000 and the 101st Amendment Act of 2016. The 80th Amendment came to fulfil the recommendations of the 10th Finance Commission. The 10th Finance Commission recommended that out of the total income obtained from certain central taxes and duties, 29% should go to the states. This is known as the ‘Alternative Scheme of Devolution’.

The 101st Amendment Act of 2016 introduced a new taxation system for the whole country. This new taxation system is known as the “Goods and Services Tax”.  Parliament and the state legislature have the power to make laws for the goods and services tax. Though the Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce. The goods and services tax has almost removed the indirect tax of the centre and the state.

The 101st Amendment has removed Article 268-A, which deals with service tax. It also removed 92-C from the Union List, which belongs to service tax. These two were added by the 88th Amendment Act of 2003.

 After these two amendments (the 80th and 101st Amendment), the current distribution of tax revenues is as follows:

• Taxes Levied by the Centre but Collected and Appropriated by the States (Article 268)

This category includes stamp duties on bills of exchange, cheques, policies of insurance, promissory notes, transfers of shares and others. The proceeds of these duties levied within any state do not form a part of the Consolidated Fund of India but are assigned to that state.

• Tax Levied and Collected by the Centre but Assigned to the States (Article 269)

This category includes the following taxes: (A) Taxes on the sale or purchase of goods (except newspapers) in the course of inter-state trade or commerce; (B) Taxes on the consignment of goods in the course of inter-state trade or commerce. These taxes do not form a part of the Consolidated Fund of India. These taxes are assigned to the concerned states in accordance with the principles laid down by Parliament.

• Taxes Levied and Collected by the Centre but Distributed between the Centre and the States (Article 270)

It includes all taxes and duties referred to in the Union List except the following: (A) Taxes and duties are referred to in Articles 268, 269, and 269A; (B) Surcharge on taxes and duties referred to in Article 271; and (C) Any cess levied for specific purposes.

The manner of distribution of these taxes and duties is prescribed by the President on the recommendation of the Finance Commission.

• Surcharge on Certain Taxes and Duties for Purposes of the Centre (Article 271)

The surcharge on taxes and levies alluded to in Articles 269 and 270 can be imposed by Parliament at any time. The proceeds of such surcharges go to the Centre exclusively. Although the surcharge on goods and services taxes (GST) does not apply.

• Taxes Levied and Collected and Retained by the States

These taxes belong to the state exclusively. They are enumerated in the state list and are 18 in number. The following taxes fall under this category: (A) Land revenue; (B) Taxes on agricultural income; (C) Taxes on agricultural land succession; (D) Estate duties in respect of agricultural land; (E) Taxes on lands and buildings; (F) Taxes on mineral rights; (G) Taxes on animals and boats; (H) Taxes on road vehicles; (I) Taxes on tolls; (J) Taxes on entertainment; (K) Excise duties on alcoholic liquor for human consumption and narcotics; (L) Taxes on consumption or sale of electricity; (M) Taxes on goods and passengers carried by road or on inland waterways; (N) Taxes on professions, trades and employments; (O) Capitation taxes; (P) Stamp duty on documents (except those specified in the Union List); (Q) fees on the matters enumerated in the State List (except court fees); (R) Sales tax (other than newspaper).

Distribution of Non-tax Revenues-

• The Centre: The major sources of non-tax revenues for the centre are the following: (A) Railways; (B) Banking; (C) Posts and Telegraphs; (D) Broadcasting; (E) Central public sector enterprise; (F) coinage and currency; and (G) Escheat and Lapse.
•  The States: The major sources of non-tax revenues for the states are the following: (A) Forests; (B) State public sector enterprise; (C) irrigation; (D) Fisheries; and (E) Escheat and Lapse.

Grants- in- Aid to the States-

Although the distribution of taxes between the Centre and the states is fixed by the Constitution.  Furthermore, the Constitution makes provision for grants-in-aid to the states from central resources. There are two types of grants-in-aid:

• Statutory Grants: Article 275 of the Constitution empowers the parliament to make grants to states which are in need of financial assistance and not to every state. This financial aid can be different for different states. The amount of this type of financial aid is charged to the Consolidated Fund of India every year. Besides this general provision, the Constitution also empowers Parliament to make specific grants for promoting the welfare of the scheduled tribes in a state or for raising the level of administration of the scheduled areas in a state. The statutory grants (general and specific) under Article 275 are given to the states based on the recommendation of the Finance Commission.

• Discretionary Grants: Article 282 of the Constitution empowers both the centre and the states to make any grants for any public purpose, even if it is not within their legislative competence. Under this provision, the Centre can make grants to the states. But the Centre is under no obligation to give these grants. The discretionary grants share the larger part of the central grants to the states when compared with the statutory grants.

• Other Grants: The Constitution also provides for a third type of grants-in-aid, but for a temporary period. For example, grants for the states of Assam, Bihar, Odisha, and West Bengal in lieu of export duties on jute and jute products. These grants were to be given for a period of 10 years from the commencement of the constitution based on the recommendation of the Finance Commission.

Finance Commission-

The First Finance Commission was constituted in 1951, with Sri Neogy as the Chairman, and it submitted its report in 1953. Article 280 of the Constitution makes provision for the Finance Commission as a quasi-judicial body. It is set up by the President every fifth year or even earlier. It makes recommendations to the President on the following matters:

• The distribution of taxes to be shared between the centre and the states and the allocation of such taxes between the states.
• The principles which should govern the grants-in-aid to the states by the Centre which is related to the Consolidated Fund of India.
• The measures needed to increase the Consolidated Fund of the state to supplement the resources of the panchayats and the municipalities in the state on the basis of recommendations made by the State Finance Commission.
• Any other financial matter referred to it by the President.

At the time of the commencement of the constitution, the Finance Commission recommended grants for the states of Assam, Bihar, Odisha, and West Bengal in lieu of export duties on jute and jute products. These grants were to be given for a period of 10 years.

Protection of the States Interest-

To protect the interests of the states in financial matters, the following bills can be introduced in Parliament only on the recommendation of the President:

•  A bill which varies the rate of any tax or duty in which the States are interested.
•  A bill which affects the principles on which money is distributable to states according to the foregoing provisions of the Constitution.
• A bill which imposes any surcharge on any specified tax or duty for the purpose of the centre.
• A bill which varies the meaning of the term ‘agricultural income’ as defined for the purposes of the enactments relating to Indian income tax.

Borrowing Powers of the Centre and the States-

The Constitution makes the following provisions with regard to the borrowing powers of the Centre and the states:

•  The central government can borrow either within India or outside, upon the security of the Consolidated Fund of India or can give guarantees, but both within the limits fixed by the parliament. As of now, no such law has been enacted by Parliament.
•  A state government can borrow only within India (not abroad) upon the security of the consolidated fund of the state or can give guarantees, but both within the limits fixed by the legislature of that state.
• If the Centre has guaranteed an outstanding loan of the State, no fresh loan can be raised by the State without the consent of the Central government.
• The Government of India may itself offer a loan to a State, under a law made by Parliament. So long as such a loan or any part thereof remains outstanding, no fresh loan can be raised by the State without the consent of the Government of India.

Immunity from Mutual Taxation-

Like any other federal constitution, the Indian Constitution also contains the rule of “immunity from mutual taxation”. The following provisions apply in this regard:

• Immunity of Central Property from State Taxation- Article 285 of the Constitution is related to the exemption of central property from state taxation. The property of the Centre is exempted from all taxes imposed by a state or any authority within a state, like district boards, municipalities, panchayats, and so on. However, Parliament is empowered to remove this ban. The word “property” includes lands, buildings, shares, everything that has a money value, and every kind of property, movable or immovable. Further, the property may be used for sovereign (like the armed forces) or commercial purposes. This exemption is not applicable to companies or corporations created by the central government. The reason is that a corporation or a company is a separate legal entity.
• Exemption of State Property or Income from Central Taxation- Article 289 of the Constitution is related to the exemption of state property or income from central taxation. The property of a state is immune from central taxation. However, the immunity does not extend to all central taxes but is confined only to such taxes as are levied on property. Therefore, a state is not immune from customs duties or duties of excise. In other words, the Centre can impose a customs duty on goods imported or exported by a state, or an excise duty on goods produced or manufactured by a state. Not only the ‘property’ but also the ‘income’ of a state is exempted from central taxation. However, the exemption is confined to the state government and does not extend to any local authority situated within the state. The immunity of the income of a state is again subject to the overriding power of Parliament as regards any income derived from a commercial activity. Thus- (A) Ordinarily, the income derived by a state from commercial activities shall be immune from income-tax levied by the Centre. However, Parliament is competent to tax the income of a state derived from a commercial activity; (B) However, the Parliament can declare any particular trade or business as incidental to the ordinary functions of the government, the income from such functions shall be no longer taxable, so long as such declaration stands.

Financial Relations between Centre and the State During Emergencies-

The Centre and state financial relations change during emergencies. These are as follows:

• National Emergency: While a proclamation of national emergency (under Article 352) is in operation, the President can change the constitutional distribution of revenues between the Centre and the states. In the other words, the President can either reduce or cancel the transfer of finances (both tax sharing and grants-in-aid) from the Centre to the states. Such change continues till the end of the financial year in which the emergency ceases to operate. If the President issues such an order, the states will be left to their limited resources from the State List, with no contribution from the Centre.
• Financial Emergency: While a proclamation of financial emergency (under Article 360) is in operation, the Centre can give directions to the states: (A) to observe the specified canons of financial propriety and other safeguards as may be specified in the directions; (B) to reduce the salaries and allowances of all persons serving in connection with the affairs of the state (including the high court judges); and (C) to reserve for the consideration of the President all money and financial bills, after they are passed by the legislature of the state.

To know about the Articles Related to Centre-State Financial Relations, refer to the table.

Trends in Centre-State Relations

Till 1967, centre-state relations were smooth due to one-party rule at the centre and in most of the states. In the 1967 elections, the Congress party was defeated in nine states, and its position at the Centre became weak. This new political scenario ushers in a new era in Centre-state relations. The non-Congress governments in the states opposed the increasing centralisation and intervention of the central government. They raised the issue of state autonomy and demanded more powers and financial resources from the states. This caused tensions and conflicts in centre-state relations.

Tension Areas in Centre-State Relations-

The issues that created tensions and conflicts between the Centre and states are:

• Mode of appointment and dismissal of governor.
• Discriminatory and partisan role of governors.
• Imposition of President’s rule for partisan interests
• Deployment of central forces in the states to maintain law and order
• Reservation of state bills for the consideration of the President
• Discrimination in financial allocations to the states
• Management of All-India services
• Use of electronic media for political purposes
• Encroachment by the centre on the state list
• Sharing of finances between Centre and states.
• Role of Planning Commission in approving state projects.
• Appointment of enquiry commissions against the chief ministers.

The issues in centre-state relations have been under consideration since the mid-1960s.

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