UP PCS Mains-2024

Approach  Start your answer by mentioning articles associated with financial relations between the centre and states. Discuss the issues and steps taken by the finance commission to address it. Conclude on a positive end.

Introduction

Articles 268 to 293 in Part XII of the constitution deal with center-state financial relations. Besides these, the 7^th schedule of the Indian Constitution deals with several subjects allocated to the center and states are related to the financial relationship between them.

Body

Constitutional provision related to Centre-State financial relations

• Finance Commission: Under Article 280 there is a provision of the Finance Commission which is responsible for suggesting the principles for the revenue distribution between the centre and states.
• Allocation of taxing power:
  • Parliament has the exclusive power to levy taxes on subjects enumerated in the Union list and residuary subject.
  • State legislature has the exclusive power to levy taxes on subjects enumerated in the state list.
  • Both union and state can levy taxes on matters enumerated in the concurrent list.
• Distribution of tax revenues:
  • Article 268: Taxes levied by the Union but collected and appropriated by the states. The proceeds under this form part of the consolidated fund of the state. Ex: Stamps duty, excise duty.
  • Article 269: Taxes levied and collected by the Union but assigned to the states. Ex: Taxes on the sale or purchase of goods (other than newspapers) in the course of inter-state trade.
  • Article 270: Taxes levied and distributed between the Union and the states. The matter of distribution of these taxes is prescribed by the President based on the recommendation of the Finance Commission..
• Grants-in-Aid to the states:
  • Statutory grants (Article 275): It empowers the parliament to make grants to the states which are in need of financial assistance and not to every state.
  • Discretionary grants (Article 282): It empowers both the centre and the states to make any grants for any public purpose, even if it is not within their legislative competence.
• GST Council : 101^st Amendment Act 2016 introduced Goods and Services Tax (GST) and provided for the establishment of the GST Council under Article 279A for deliberation and joint decision making

Issues in Centre-state financial relationship:

• The introduction of the Goods and Services Tax (GST) has reduced the taxation power of the states, making them more dependent on the Centre for finance. For example: Delays in fund transfer like GST compensation, Integrated GST (IGST) etc.
• Cess does not form part of the divisible pool and this reduces the financial resources of the state.
• GST council makes taxation decisions which were previously independently dispensed by the states. This has reduced taxing power of the states related to indirect taxes.
• Horizontal imbalances and rising regional inequalities are the result of inadequate finance administration.
• The Union government utilizes Centrally Sponsored Schemes (CSS) and Central Sector Schemes (CS) as direct financial transfers to States, influencing their fiscal priorities.This approach compels States to commit equivalent financial resources alongside Union funds.

Role of the finance commission in addressing the fiscal issue between centre-state relation:

• Higher tax devolution to the states from 32% to 42% based on 14th finance commission recommendations. (Now changed to 41% as per recommendation of 15th FC)
• The Demographic Performance criterion has been introduced to reward efforts made by states in controlling their population.
• Encourages States to maintain fiscal discipline through performance-based grants.Incentives for reforms in power sector, ease of doing business, and digital governance.
• Address specific State needs like border security, hill area development, and tribal welfare.
• Strengthens Panchayati Raj Institutions and Urban Local Bodies.
• Allocates funds for disaster preparedness and relief efforts.

Conclusion

Like in the legislative and executive domains, the Union Government is more powerful than the states in financial domain. Smooth financial relations between centre and state are important for the welfare of public given the important role of states in implementing policies of both centre and state.