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Indian Economic Policy

Notes Constitutional Provisions
Allocation of Revenues between the Centre and States : The Constitution has divided tax-sources
between the Centre and the States so that there should be no overlapping of tax jurisdiction, otherwise,
it will cause confusion and conflict. Thus, the distribution of taxes in India is more logical and thorough
than in other federations. There are three lists : the Union List (List I), the State List (List II) and the
Concurrent list (List III).
Taxing Powers : In effecting a division of resources, the Constitution provides for a strong centre.
The Constitution ensures the supremacy of the action of the Union Government over the fairly
comprehensive Union list as also over concurrent jurisdiction. Allocation of the heads of taxation
between the Union and the States is based on; he broad principle that taxes which are location-
specific and relate to subjects of local consumption have been assigned to the States. Those taxes like
for example Income tax which are of inter-state significance and where the place of residence is not a
correct guide to the true incidence of tax have been vested in the Union. This clear-cut division of
heads of taxation between the Union and States has minimised the scope for conflicts and litigation
between them. The taxes over which the Union has legislative jurisdiction can be classified as follows:
(a) Taxes which are to be levied and collected by the Union and the entire proceeds therefrom are
to be retained by it. These include co-orpration tax and Customs duties.
(b) Taxes which are levied and collected by the Union but proceeds are shared with the States.
These are income tax, and excise duties.
(c) Taxes which are levied by the Union but collected and retained by the States. These are estate
duties and terminal taxes on goods and services.
(d) Taxes which are levied by the Union but collected and retained by the States. These are excise
duties on medicinal and toilet preparations (containing alcohol), opium, etc.
Article 286 of the Constitution forbids taxation by States of
(a) Imports into or exports from the tercitory of India;
(b) Inter-state trade; and
(c) sale of goods declared the Parliament by law to be essential for the life of the community.
The property of the Union is exempt from State taxation. The property and income of the States are
exempt from the Union taxation. In addition to the provisions for tax-sharing, Article 275 of the
Constitution provides for both general purpose and specific grants. However, it has been left to the
Parliament to decide which States are in need of grant assistance and to what extent subject to the
recommendations of the Finance Commission.
Finance Commission
The Finance Commission of India came into existence in 1951. It was established under Article 280 of
the Indian Constitution of India by the President of India. It was formed to define the financial relations
between the Centre and state. The Finance Commission Act of 1951 States the terms of qualification,
appointment and disqualification, the term, eligibility and powers of the Finance Commission. As
per the Constitution, the commission is appointed every five years and consists of a chairman and
four other members. Since the institution of the first Finance Commission, stark changes have occurred
in the Indian economy causing changes in the macro-economic scenario. This has led to major changes
in the Finance Commission’s recommendations over the years. Till date, Thirteen Finance Commissions
have submitted their reports.
Planning Commission

In Centre-State financial relations, the Planning Commission is another important body which has
an important place. The responsibility for taking decisions and implementing plans rests with the
Union and the State Governments. It may be noted that the resolution emphasised the need for
“adequate coordination” between the development schemes initiated by the Union and the States.
This was also to be done for comprehensive planning based on a careful appraisal of resources and
essential conditions of progress of the country.

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