Financial Relations between Centre and State


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 Parliament can levy taxes on the subjects included in the Union List.

The States can levy taxes on the subjects in the State List.

By and large taxes that have an inter-state base are levied by the Centre and those with a local base by the State.

The Union List consists of items of taxation which fall under the following categories:

[1] Taxes levied by the Union but collected and appropriated by the State such as stamp duties and duties of excise on medicinal and toilet preparations etc.

[2] Taxes levied and collected by the Union but assigned to the States viz. railways, sea or air etc.

[3] Taxes levied and collected by the Central and may be distributed between the Central and the states if the Parliament by law so provides, such as union excise duties, excise on toilet preparations etc.

[4] Taxes levied and collected and retained by the Centre such as customs, surcharge on income tax etc.

[5] Taxes levied and collected by the Centre and distributed between the union and the states such as taxes other than agriculture etc.

The Centre can exercise control over the state finances and grants-in-aid both general and special to meet the expenditure on developmental schemes.

During financial emergency, the President has the power to suspend the provisions regarding division of taxes between the Centre and the State.

He can also impose other restrictions on the expenses of the State.

State plans are framed within the priorities of the central plan and they are executed with the approval of the Planning Commission.

Further, the States have to carry out the centre-sponsored schemes for which the Centre gives grants and the conditions under which these are to be made.

The Planning Commission has created an over-centralized planning system.

No initiative is left to the states and the centrally formulated schemes have been inappropriately and unimaginatively imposed upon them.