CENTRE-STATE FINANCIAL RELATIONS (Syllabus: GS Paper 2 – Polity)

Context: Since the beginning of the Fourteenth Finance Commission award period (2015-16), the Union government has steadily decreased financial transfers to states.

 Centre State Financial Relations

• About: Articles 268 to 293 in Part XI of the Constitution primarily address Centre-state financial relations.
• Taxes and Duties: Stamp duties and excise duties on medical and toilet preparations are levied by the Union but collected by States, except in Union Territories.
• Service Tax: These are levied by the Centre but collected and appropriated both by the Centre and States.
• Union Taxes Assigned to States (Art.269): Includes succession duty, estate duty, terminal taxes on goods/passengers, and taxes on railway fares/freights.
• Distribution of Union-State Taxes (Art.270): Certain taxes from the Union List are collected by the Union and shared with States according to prescribed proportions.
• Excludes specific-purpose cess or surcharge.
• State Taxes: Taxes listed in the State List are levied, collected, and exclusively retained by States.
• Grants-in-Aid: Parliament can provide grants from the Consolidated Fund of India to needy States, especially for tribal welfare.
• Loans and Presidential Sanction (Art. 274): Union can provide loans or guarantees to States; requires Presidential sanction for bills affecting State taxes or financial principles.
• Distribution of Non-Tax Revenues: Central and State shares from various non-tax revenue sources like post, telegraph, railways, etc.

  Some Basic Math on Tax Revenue

  • Recommendation: Finance Commissions recommend the States' share in the net tax revenue of the Union government.
  • Difference Between Gross and Net Tax Revenue: The difference includes collection costs, revenue assigned to Union territories, and cess and surcharges.
  • Share Discrepancy Over Years: While recommended shares were 42% (14th FC) and 41% (15th FC), actual gross tax revenue shares were 35% (2015-16) and 30% (2023-24).
  • Share Decline: Share of statutory financial transfers in Union government's gross tax revenue declined from 48.2% to 35.32%.