Page 331 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 25: Government Finance: Union and States

States have been assigned certain taxes which are levied and collected by them, they also share Notes
in the revenue of certain Union taxes, and there are certain other taxes which are levied and
collected by the Union but the proceeds of which wholly go to the States.
• The Constitution of India makes a clear division of fiscal powers between the Union (on the centre)
and, the State Governments. The principle adopted for this classification is that taxes which have an
interstate base are levied by the Union, while those with a local base are levied by the States.
• Apart from the taxes levied and collected by the States, the Constitution had provided for the
revenues for certain taxes on the Union list to be allocated, partly or wholly, to the States. These
provisions fall into various categories.
• The importance of Central contributions to State resources becomes clear from Table 1 showing
the transfer in broad categories since the inception of economic planning.
• Under the provisions of Article 280 of the Constitution, the President is required to appoint a
Finance Commission for the specific purpose of devolution of non-Plan revenue resources.
• The First Finance Commission, for instance, recommended the allocation of income tax proceeds
on the basis of 80 per cent and 20 per cent for population and collection. This criterion benefited
populous states as well as those richer states which contributed more income tax revenue.
• As regards the horizontal distribution of the proceeds of Central Excise Duties among States,
the Finance Commissions had initially adopted two criteria, viz., the population of the State
and the backwardness of the States. This system of distribution clearly favoured populous but
economically backward states like Uttar Pradesh and Madhya Pradesh.
• 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.
• The estate duty was levied by the Centre in 1953 but the proceeds were to be assigned to the
States. The Second Finance Commission recommended that one per cent of the net proceeds
should be assigned to the Union Territories and balance to be divided among the States.
• The finance commissions only recommended writing-off of some loans and rescheduling some
portion” of them. The Ninth Finance Commission was against such steps and asked states to be
careful and exercise restraint in incurring additional debt.
• The appointment of a Finance Commission at intervals of five years or less has great significance
for the financial relations between the Union and the States. Periodic examination of the division
of resources and suitable modifications in it imparts a degree of flexibility to the finance of both
the Centre and the States.
• In the last few decades, there has always been growing conflict and tension between the Indian
Union and the States in the matter of finance. This conflict has often been aggravated by political
and ideological differences between the different parties governing the Centre and the States.
• Taxation of industrial and commercial properties has been the preserve of the Centre, and tremendous
expansion in the base of industrial and commercial property, income and wealth as a result of
economic development 11 as been responsible for raising the financial resources of the Centre.
• The period since 1951 has witnessed an enormous expansion of financial powers of the Central
Government whose dimensions have progressively increased in relation to the combined
resources of all State Governments put together.
• West Bengal, Jammu and Kashmir, Punjab, Maharashtra and Southern states have generally
been very agitated over the question of state’s autonomy.
• A serious complaint of some of the States like Kerala is about the regional imbalance in industrial
development. The complaint is that the Centre has not used its fiscal dominance over States to
correct regional imbalances.
• The Rajamannar Committee on Centre-State relations (it submitted its report in May 1971) and
the West Bengal Memorandum came out with a string of suggestions and recommendations
aiming at autonomy of the states, consistent with the integrity of the country.

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