Distribution of Revenue between the Union


  1. Eleven systems of distribution of revenue between the union and states are as follows:

  2. 1. Taxes and Duties levied by the Union:

  3. The Constitution exclusively assigns certain items of revenues to the Union. These are customs and export duties, income tax, excise duties on tobacco, jute and others i.e. taxes on any item covered in the Union List.

  4. 2. Taxes and Duties levied and used by the States:

  5. There are certain items of revenue which fall under the exclusive jurisdiction of the States. These are: land revenue, stamp duty except on documents included in the Union List; succession duty and estate duty in respect of agricultural land; and others.

  6. 3. Taxes levied by the Union but collected and appropriated by States:

  7. The revenues from the following items are collected and appropriated by the states:

  8. (a) Stamp duties on bills of exchange, cheques, promissory notes, bills of lending, letters of credit, policies of insurance, transfer of shares and some others.

  9. (b) Excise duties on medicinal and toilet preparations containing alcohol; opium and others. Union Government can levy taxes on such items but the revenue is collected by the States and forms part of their finances.

  10. 4. Taxes levied and collected by the Union but given to States:

  11. The taxes on some items are levied and collected by the Union but exclusively allotted to the States from which these are collected. They are taxes on railway freights and fares, terminal taxes on goods or passengers carried by rail, sea or air, estate duty in respect of property other than agricultural land.

  12. 5. Taxes levied and collected by the Union and distributed between the Union and the States:

  13. There are certain items, the taxes on which are levied by the Centre, collected by it but shared with the States. The proportion of share is determined by rules and regulations. Such items are tax on income, other than agricultural income, excise duties on items other than medicinal and toilet preparations

  14. 6. Central Grants in-aid to the States:

  15. The sources of revenue available the States cannot fully meet their needs. The Constitution, therefore, provides for system of Grants-in-aid form the Union to the States. It provides that Parliament may by law give grants-in-aid to the needy States. The amount is determined by the Parliament. Apart from this, the States can also make requests for borrowing for their specific projects.

  16. The Constitution makes special provisions for giving grants-in-aid to schemes for promoting the welfare of Scheduled Tribes and backward people. The States of Assam, Bihar, Orissa and West Bengal get grants in lieu of expo duty on jute and jute products.

  17. 7. Union Government's Power to Borrow and Raise loans:

  18. The Union Government has the power to borrow money on the security of the Consolidated Fund of India, subject to such limitations as may from time to time be fixed by the Parliament by an Act. A State can borrow finances within the territory of India upon the security of its Consolidated Fund. The States of the Union cannot raise foreign loans without the consent of the Union.

  19. 8. Financial Emergency and Powers of the Union:

  20. During the proclamation of Financial Emergency in India, the President can suspend the provisions relating to the division of the revenue between the Union and the States and grants-in-aid to the States.

  21. 9. Control over States through the Comptroller and Auditor General of India:

  22. The Comptroller and Auditor General of India (CAG) who is responsible for the maintenance and audit of the accounts of the Union and States is an official of the Central government. He is appointed by the President of India. The manner in which j the accounts are to be maintained by the States is determined by the CAG. The States have to follow his orders and directions in respect of maintenance of their accounts and to get these audited.

  23. 10. The Finance Commission:

  24. The Constitution vests in the President' the power to appoint a Finance Commission, after every five years. The Commission has the power to make recommendations for the distribution of income from taxes between ' the States and the Union. It also decides the manner of giving grants-in-aid and financial assistance to the States.

  25. 11. Centralised Planning:

  26. Another system which favours increased Central control over the States is the system of centralized planning that prevails in India. The Planning Commission is a central institution which formulates plans and allocates plan resources and objectives to the States.

  27. The States are dependent upon the Union even for establishing heavy and capital goods industries within their territories. After in nationalisation of Banks, Life Insurance and General Insurance, the role of the Union in the fiscal management got increased manifold. By the new Panchayati Raj Act some additional financial resources and powers have been given directly to the Panchayati Raj institutions. It has also strengthened the District Planning Boards.

  28. The above account of the financial relations again demonstrates the superiority of the Union over the States in respect of financial relations. The States are dependent upon the Union for grants-in-aids as well as for raising loans or debts. The sources of income of the Union are considerably more potent than the sources of income of the States.

  29. The above description of legislative, administrative and financial, relations between the Union and State reflect Unitarianism as a major feature of the Indian federal system. The working of Indian Federalism during the past points out towards an increasing tendency towards centralism.

  30. The State List now has in effect 61 subjects in place of the original 66. The Union List has 98 subjects involving one additional subjects and the Concurrent List has in effect now 52 subjects, 5 more than the original, over which the Union has a superior right.

  31. The Union Government at times, behaves as a big brother over States. The States have been demanding more autonomy, particularly in respect of financial matters. The Union has been finding the States in a confrontation list mood. Indian federalism has been becoming more and more conflictualist and confrontationist.

  32. On several issues the Union and States have at times adopted different, even opposed stands. The need is to make it a cooperative- competitive federalism. The Sarkaria Commission, while recommending some modifications has maintained the need to keep the Centre strong. But at the same time it has called for managing the Indian federal system in a cooperative manner by both the Union and States. There is, however, currently present a distinct demand for the grant of more powers and autonomy to the States of the Indian Union.

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