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

News-CRUX-10     15th July 2024        
QEP Pocket Notes

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%.
QEP Pocket Notes