Page 323 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 25: Government Finance: Union and States

(c) Additional Excise Duties in lieu of Sales Tax Notes
Apart from the usual excise duties, the Central Government has been levying additional excise
duties on sugar, tobacco, cotton fabrics, woollen fabrics and man-made fabrics-- these goods
were declared to be goods of special importance in inter-state trade and commerce. This scheme
of levying additional excise duties on the above goods was the outcome of an agreement reached
at the meeting of the National Development Council (NDC) held in December 1956, by which
the States agreed to refrain from exercising their power to levy sales tax on these commodities
in lieu of a share in additional excise duties to be levied by the Centre. Accordingly, since 1957,
the Centre has levied and collected these additional excise duties and the entire proceeds (after
deducting the share of Union territories) are distributed among the States in accordance with
the principles of distribution laid down by the Finance Commissions from time to time.
The Second, Third, Fourth and Fifth Finance Commissions adopted a procedure under which
they first
(a) set apart the guaranteed level of States’ revenue which the States were realising from
sales tax on these commodities in 1956-57 and then (b) the balance amount of additional
excise duties was distributed among the States according to specific principles. The Finance
Commissions adopted such criteria as
(a) Percentage increase in the collection of sales tax in each State since 1956-57; and
(b) size of population of each State.
The Sixth Finance Commission made a departure from the earlier practice of first setting apart
a minimum guaranteed amount for each State and then distributing the balance—the
Commission was convinced that the share of each State would always exceed the revenue they
would have realised in 1956-57 from the respective sales taxes on these commodities.
As regards the basis of distribution, the Sixth Finance Commission took the view that the
additional duties of excise were levied in lieu of sales tax, which was itself a tax on consumption,
the shares of various states should correspond to their shares in the consumption of these
commodities. However, the Commission felt that reliable consumption figures were not available
and, accordingly, it took State domestic product (SDP) and population as reliable approximation
of consumption levels. Besides, the Commission also felt that the States would have realised
sales tax not merely on what was consumed in the State but also on what was produced in the
State and sold in the course of inter-state transactions of these commodities. Hence, the Sixth
Finance Commission allocated the shares of additional duties on excise on the basis of population,
State domestic product (SDP) and production in the ratio of 70 : 20 : 10. The subsequent finance
commissions accepted this principle with minor modifications.
(d) Grant in lieu of Tax on Passenger Fares
Article 269 of the Constitution empowers the Government of India to levy and collect taxes on
railway fares and freights but the net proceeds are to be assigned to the States. This tax was first
imposed in 1957 and the proceeds were distributed to the States. The tax was repealed in 1961.
Actually, the tax on passenger fare was merged with the basic fare and the system of grant was
introduced to compensate States for the consequential loss of revenue. The tax on passenger
fare was revived in 1971 but was again repealed in 1973. Now, the Finance Commissions were
given the responsibility to suggest the grants to be made to the States in lieu of the tax on
passenger fares. There are two points to be decided :
(a) What should be the volume of grant the Centre should transfer to the States in lieu of the
tax on passenger fares, i.e., should it be a fixed amount or should it be a fixed percentage
of the total passenger earnings; and
(b) What should be the basis of inter-state sharing of the grant ?
On the first question, there has always been differences between the Centre and the States. At
the time the tax on passenger fare was repealed, it contributed 10.7 per cent of the non-suburban
railway passenger earnings. Accordingly the States have insisted that the grant should be pegged
at 10.7 per cent of the railway passenger earnings at all times. On the other hand, the Railways

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