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Centre-State Financial Relations

Articles 268 to 293 in Part XII of the Constitution deal with Centre-state financial relations. Besides these, there are other provisions dealing with the same subject.

  1. Sources of revenue of Union Government
    1. Custom and Export Duty
    2. Income Tax – Corporation Tax
    3. Estate Duty (Excluding Agriculture)
    4. Excise Duty on Tobacco and other intoxicants – Succession Duty (Excluding Agriculture)
    5. Inter - State Trade Tax, etc.
  2. Sources of Revenue of State Governments
    1. Taxes on agriculture,
    2. House Tax, Tax on Electricity,
    3. Toll Tax,
    4. Entertainment Tax,
    5. Tax on Boats,
    6. Tax on Vehicles,
    7. Tax on cattle and house-hold animals,
    8. Tax on Minerals, etc.
  3. Grants to the States - Article 275
  4. Appointment of Finance Commission - Article 280
  5. Financial Emergency - Article 360
  6. Provision of Comptroller and Auditor General

Indian Constitution has made elaborate provisions, relating to the distribution of the taxes as well as non-tax revenues and the power of borrowing, supplemented by provisions for grants-in-aid by the Union to the States.

The Constitution divides the taxing powers between the Centre and the states as follows:

The Parliament has exclusive power to levy taxes on subjects enumerated in the Union List, the state legislature has exclusive power to levy taxes on subjects enumerated in the State List, both can levy taxes on the subjects enumerated in Concurrent List whereas residuary power of taxation lies with Parliament only.

The distribution of the tax-revenue between the Union and the States stands as follows:

  1. Duties Levied by the Union but Collected and Appropriated by the States: Stamp duties on bills of Exchange, etc., and Excise duties on medical and toilet preparations containing alcohol. These taxes don't form the part of the Consolidated Fund of India, but are assigned to that state only.
  2. Service Tax are Levied by the Centre but Collected and Appropriated by the Centre and the States.
  3. Taxes Levied as well as Collected by the Union, but Assigned to the States: These include taxes on the sale and purchase of goods in the course of inter-state trade or commerce or the taxes on the consignment of goods in the course of inter-state trade or commerce.
  4. Taxes Levied and Collected by the Union and Distributed between Union and the States: Certain taxes shall be levied as well as collected by the Union, but their proceeds shall be divided between the Union and the States in a certain proportion, in order to effect on equitable division of the financial resources. This category includes all taxes referred in Union List except the duties and taxes referred to in Article 268, 268-A and 269; surcharge on taxes and duties mentioned in Article 271 or any Cess levied for specific purposes.
  5. Surcharge on certain duties and taxes for purposes of the Union: Parliament may at any time increase any of the duties or taxes referred in those articles by a surcharge for purposes of the Union and the whole proceeds of any such surcharge shall form part the Consolidated Fund of India.


Besides sharing of taxes between the Center and the States, the Constitution provides for Grants-in-aid to the States from the Central resources. There are two types of grants:-

  1. Statutory Grants: These grants are given by the Parliament out of the Consolidated Fund of India to such States which are in need of assistance. Different States may be granted different sums. Specific grants are also given to promote the welfare of scheduled tribes in a state or to raise the level of administration of the Scheduled areas therein (Art. 275).
  2. Discretionary Grants: Center provides certain grants to the states on the recommendations of the Planning Commission which are at the discretion of the Union Government. These are given to help the state financially to fulfill plan targets (Art. 282).

Effects of Emergency on Center-State Financial Relations

  1. During National Emergency: The President by order can direct that all provisions regarding division of taxes between Union and States and Grants-in-aids remain suspended. However, such suspension shall not go beyond the expiration of the financial year in which the proclamation ceases to operate.
  2. During Financial Emergency: Union can give directions to the States:-
    1. To observe such canons of financial propriety as specified in the direction.
    2. To reduce the salaries and allowances of all people serving in connection with the affairs of the State, including High Courts judges.
    3. To reserve for the consideration of the President all Money and Financial Bills, after they are passed by the Legislature of the State