1.

Constitutional Provisions – Centre State relations – Taxing powers –

Expenditure responsibilities

Constitutional Provisions – Centre State relations

 Article 40
o Requires the state to take steps to organize village panchayats and
endow them with such powers and authority as may be necessary to
enable them to function as units of self-government.

 Article 243-243O
o Deals with gram sabha, state finance commission, elections, reservation
to women and scheduled caste, state election commission, etc.

 Article 243P-243ZG
o Deals with three tiers of urban governance structure, district planning
committee, reservation to women and scheduled caste, elections etc

 Article 371
o Special provision with respect to the States of Maharashtra, Gujarat,
Nagaland, Assam, Goa, Sikkim, etc.

 Schedule 5
o Provisions as to the Administration and Control of Scheduled Areas and
Scheduled Tribes

 Schedule 6
o Deals with provisions related to the Administration of Tribal Areas in
the States of Assam, Meghalaya, Tripura, and Mizoram.

Constitutional Provisions – Financial relations

Article Provision
246 Subject Matter of Union and States to make laws on Taxation
265 Taxes not to be imposed save by authority of law
266 Consolidated Funds and public accounts of India and of the States
267 Contingency Fund of India

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 268 Duties levied by the Union but collected and appropriated by the State
269 Taxes levied and collected by the Union but assigned to the States
269 (A) Position in GST Regime
269(A) Parliament will make laws on the Inter-state trade and commerce
(5)
270 Taxes levied and distributed between the Union and the States
271 Surcharge on certain duties and taxes for purposes of the Union
273 Grants in lieu of export duty on jute and jute products
274 Prior recommendation of President required to Bills affecting taxation
in which States are interested
275 Statutory grants
276 Taxes on professions, trades, callings and employments
277 Saving of pre-constitutional laws
279 Calculation of net proceeds
279 A GST Council
280 Finance Commission to recommend distributing financial resources
between the central and state governments
281 the process of how the recommendations of the Finance committee will
be introduced in parliament
282 Discretionary grants to state and local governments for specific
purposes

 Article
o

Centre State relations – Taxing powers

 Articles 268-293, mentioned in Part XII of the Constitution, specifies the
financial relations between the Centre and the States
 Division of taxation authorities between the federal government and the states:
o The Parliament has the authority to charge the union list taxes
o The state legislature has sole authority to impose the taxes listed in the
State List.
o The Concurrent List enumerates the taxes that can be levied by both the
Parliament and the state legislatures
o The Parliament has the residuary power of taxation (i.e., the authority to
impose taxes not listed in any of the three lists). The parliament may
levy a gift tax, a wealth tax or an expenditure tax under this article
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 o There are no tax entries available on the concurrent list. In terms of tax
legislation, the concurrent jurisdiction is inaccessible. However, the
101st Amendment Act of 2016 provided an exemption by establishing a
unique provision for goods and services tax. The concurrent
competence to make legislators/legislation controlling goods and
services tax has been given to parliament and state legislatures by this
amendment

 The Constitution has placed the following restrictions over the taxation powers
of the states:
o A state legislature may levy taxes on certain professions, crafts, callings
and occupations. However, a state legislature is barred from levying a
tax on the supply of goods or services or both, under the following two
situations:
 When such supply occurs outside the state; and
 Where such supply occurs during the export or import process.
o The Parliament has the authority to establish standards for identifying
whether a supply of commodities or services, or both, occurs outside of
the state, or in the path of import or export
o The usage or sale of electricity is subject to a tax imposed by the state
legislature. However, no tax could be levied on the sale or use of
electricity, which is:
 Consumed by the union or sold to the union; or
 Consumed in the construction, maintenance, or operation of any
railway by the union or by the concerned railway company or
sold to the union or the railway company for a similar purpose.
o Any authority established by Parliament for controlling or developing
any interstate river or river valley shall charge a tax on any water or
power stored, generated, consumed, distributed, or sold by a state
legislature. However, in order for legislation to be effective, it must be
reserved for the President’s consideration and approval

Distribution of Tax Revenues

The 80th Amendment Act of 2000 and the 88th Amendment Act of 2003 changed
the way tax revenues were distributed between the federal government and the states.

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 The Centre imposes taxes, while the states are in charge of collecting them.
(Article 268):
o Stamp duty is charged on bills of exchange, promissory notes,
insurance policies, checks, stock transfers, and other documents
o The collected duties levied by any state (inside the state) are given to
the state rather than to the Consolidated Fund of India
o The centre imposes a service tax, but the states collect and appropriate
it (Article 268-A) (now outlawed amid GST)

 Taxes levied and collected by the federal government but distributed to state
(article 269):
o Various tariffs were levied on the sale or purchase of commodities
(other than newspapers) in the course of interstate commerce or trade
o Various tariffs on products sent in the course of interstate trade or
commerce
o All of these taxes’ net proceeds do not go into the Consolidated Fund of
India (CFI). According to the principles established by the Parliament,
they are assigned to the involved states

 Imposition and collection of Goods and Services Tax in line with interstate
trade or commerce (Article 269- A):
o The Centre imposes and collects the Goods and Services Tax (GST) on
supplies made in the course of interstate trade or commerce
o However, this tax is split between the Centre and the States in the
manner proposed by Parliament based on the GST Council’s
recommendations
o Furthermore, the Parliament has the authority to develop standards for
establishing the site of supply and when commodities or services, or
both, are supplied in the course of interstate trade or commerce

 Taxes imposed and collected by the Centre but distributed amongst the Centre
and the States proportionately (Article 270):
This category comprises all taxes and duties referred to in the Union List
except the following:
o Articles 268, 269, and 269-A deal with duties and taxes (mentioned
above).

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 o Article 271 imposes a surcharge on taxes and duties (mentioned below).
o Any tax imposed for a specified purpose. The President, on the
recommendation of the Finance Commission, prescribes the method for
distributing the net earnings of all these taxes and duties (FCs).

 Article 271-Surcharges on certain taxes and duties for purposes of the centre
o Articles 269 and 270 of the Constitution provide that the Parliament
may impose surcharges on taxes and duties at any time (mentioned
above).
o The Centre receives all of the profits from such surcharges. In other
words, the states aren’t paying any of the levies. This fee is not
applicable to the Goods and Services Tax (GST). To put it another way,
the GST will not be subject to this surcharge.
o State Government Taxes: Taxes of this nature are entirely the
responsibility of the governments. They are 18 in number and are
included on the State List.

Grants-in-Aid to the States

 In addition to taxation shared between the Union and the states, the
Constitution provides grants-in-aid to the states from federal funds.
 Statutory grants and discretionary grants are the two types of grants-in-aid to
states

 Statutory Grants
o Article 275 empowers the Parliament to offer grants to states which are
in need of financial assistance, rather than to all states. Each year, these
grants are charged to the Consolidated Fund of India (CFI)
o Aside from this standard provision, the Constitution additionally
provides for special funds to promote the welfare of scheduled tribes
(STs) in a state or to improve the quality of administration of scheduled
territories in a state, such as Assam
o Under Article 275 statutory grants (both general and particular) are
awarded to states on the Finance Commission’s recommendation

 Discretionary Grants

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o Article 282 empowers the Union and the states to give grants for any
public purpose, even if it falls outside of their own legislative
jurisdiction. The Centre is responsible for enforcing this regulation

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2. Position of States in India – Factors responsible for subordination of
Indian States

Position of States in India

 India operates as a federal state with a strong central government and
constituent units (states and union territories) that have varying degrees of
autonomy.
 The framers of the Indian Constitution pointed out that the Indian scheme was
one of ‘Cooperative Federalism,’ which indicates a desire for a federal spirit.
 Indian federalism aims at promoting close cooperation between the Centre and
the State(s)

 Legislative Relations (Articles 245-255)

o Articles 245-255 deals with legislative relations between the Union and
the states, specifically the Parliament and state legislatures
o The Constitution demarcates the areas that can be exclusively legislated
by the Centre, those exclusively legislated by the States, and those
concurrently legislated by both the Centre and the States.
o If any law passed by a state legislature conflicts with a statute of
Parliament in the concurrent list, Parliament law shall prevail.
o Thus, the Indian Constitutional framework gives precedence to the laws
passed by Parliament over those of the states

 Administrative Relations (Articles 256 to 263)

o Articles 256 to 263 deal with administrative relations, including those
between the Central Government and several state governments.
o Though India is federal, it has unitary characteristics, and so Article 256
states that state governments must ensure that they follow the laws
passed by Parliament and do not conduct any executive or
administrative functions in violation of the same

 Financial Relation (Articles 264 to 293)

o Part XII of the Constitution, Articles 264 to 293, deal with financial
relation between the Centre and the state.

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 o Because India is a federal country, it adheres to the division of powers
when it comes to taxation, and it is the responsibility of the Centre to
allocate funds to the states.

Factors responsible for subordination of Indian States

 Control of the Union over States (Administrative relations)
o Article 257(1)
 the executive powers of the State should not hamper or prejudice
the executive powers of the Centre

o Article 257(2)
 the executive power of the Union to issue directions to the States
shall also extend to the matters of construction and maintenance
of means of communication declared to be of national or
military importance

o Article 257(3)
 the executive power of the Union to issue directions to the States
shall also extend to the measures required to be taken for the
protection of the railways within a particular State

o Article 257(4)
 If the States incur excess costs in compliance to the directions
under clause (2) or clause (3), these costs shall be paid by the
Government of India

o Article 312
 provides for the establishment of "All-India services" common
to both i.e. the union and the states.
 Only the President of India has the authority to appoint them and
take disciplinary action against them

o Deployment of Military and Para-military Forces

 Military and paramilitary forces can be deployed in a state by
the union if the circumstances demand, even against the
intentions of the state administration

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o Appointment of Governor
 The governor, who is the executive head of the state, is
appointed by the President.
 He holds office during the pleasure of the President.
 He also acts as an agent of the Centre.
 Through him, the Centre indirectly exercises executive control
over the states

o Constitution of Joint Public Service Commission for Two or more State

 In addition to the Union Public Service Commission (UPSC)
and the State Public Service Commission, the Constitution
provides for a Joint Public Service Commission.
 When two or more states agree to form a joint commission by
passing a resolution in their respective legislatures, the
Parliament may create one by law.

o Judicial System
 A distinctive feature of our federal system is the presence of
integrated judicial system.
 Though we have federal form of government with two sets of
government and dual powers, there is no dual system of
administration of justice.
 This is clear by the presence of single integrated chain of courts
to administer both union and state laws with the Supreme Court
at the apex of hierarchy of courts

o Inter-State Council
 Article 263 of the Constitution empowers the President to
specify the nature of the Council's functions.
 The Council is responsible for investigating and advising on any
conflicts that may have occurred between the states.
 Furthermore, it may explore and discuss topics of mutual
interest

o Inter-State Water Disputes

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  Keeping in view this problem of unending river water disputes,
the Constitution framers vested the power to deal with it,
exclusively in Parliament.
 The Parliament hence, may by law provide for the adjudication
of any dispute or complaint, with regard to use, distribution or
control of the waters.
 The Inter-State Water Disputes Act was enacted by the
Parliament in 1956, according to which tribunals are set up for
adjudication of water disputes referred to them

 Parliamentary control in State’s Domain (Legislative relations)

o In the national interest
 As per the Article 249, if the Rajya Sabha passes a resolution
relating to a matter of national interest with a two-third majority
 Such legislation can extend to the whole or any part of the
Indian territory until the legislation operates
 Such a resolution normally lasts for one year at a time. It may be
renewed any number of times, but not exceeding one year at a
time
 These laws of Parliament will, however, cease to have effect on
the expiration of the period of 6 months after resolution has
ceased to operate

o When states make a request

 As per Article 252, if the legislature of two or more states passes
a resolution to the effect that it is desirable to have a law passed
by the Parliament on any matters in the State List, then the
Parliament can make laws for regulating that matter
 A law so enacted applies only to those states which have passed
the resolutions
 Such a law can only be amended or repealed by an Act of
Parliament and not by the concerned state legislatures

o To implement international agreements

 Article 253 empowers the Parliament to make any law for the
whole or any part of the territory of India for implementing
treaties and international agreements and conventions

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 o During a National Emergency
 Under Article 250, Parliament has the power to make laws with
respect to all matters in the State List while the proclamation of
national emergency is in operation
 Such a law, however, shall cease to have effect on the expiration
of 6 months after the proclamation of emergency has ceased to
operate.

o During President’s Rule

 Under Article 256, the Parliament is empowered to make laws
with respect to all matters in the State List when the President’s
Rule is imposed in the concerned state
 A law made so by the Parliament continues to be operative even
after the President’s Rule ceases to operate
 However, such a law can be altered or repealed or re-enacted by
the state legislature concerned

 Control over State (Financial relations)

o Reservation of State Bill by Governor
 Article 200 of the Indian Constitution provides provisions
regarding the powers of the Governor when a bill is passed by
the state legislature
 The Governor shall declare either that he assents to the Bill or
that he withholds assent therefrom or that he reserves the Bill for
the consideration of the President
 When a bill other than money bill is presented before Governor
for his assent, he either gives assent to the bill, withhold his
assent to the bill or return the bill for reconsideration of houses.
 If the bill is passed again by state legislature with or without
amendments, he has to give his assent or reserve the bill for
consideration of President.
 The Governor cannot send money bill back for reconsideration
because the money bill would usually be introduced with prior
assent of Governor only.

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  In case the money bill reserved for President’s assent, the
President has to state whether he is giving assent or withholding
his assent.
 The Constitution does not furnish any guidance to the Governor
that in which matters he should accord his assent and in which
matters he should withhold assent

o President’s assent to the State Bill

 When a bill passed by a state legislature is reserved by the
governor for consideration of the President, the President can:
 Give his assent to the bill, or
 Withhold his assent to the bill, or
 Direct the governor to return the bill (if it is not a money
bill) for reconsideration of the state legislature.
 It should be noted here that it is not obligatory for the President
to give his assent even if the bill is again passed by the state
legislature and sent again to him for his consideration.

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3. Extent of Union Power of Taxation – Inclusion of Residuary Power in
the Fiscal Power – Restriction of fiscal powers – Inter-Government Tax
Immunities – Fundamental rights – Double taxation

Extent of Union Power of Taxation (Qn. 1 – Pg. 4-6)

 The Centre imposes taxes, while the states are in charge of collecting them.
(Article 268):
o Stamp duty is charged on bills of exchange, promissory notes,
insurance policies, checks, stock transfers, and other documents
o The collected duties levied by any state (inside the state) are given to
the state rather than to the Consolidated Fund of India
o The centre imposes a service tax, but the states collect and appropriate
it (Article 268-A) (now outlawed amid GST)

 Taxes levied and collected by the federal government but distributed to state
(article 269):
o Various tariffs were levied on the sale or purchase of commodities
(other than newspapers) in the course of interstate commerce or trade
o Various tariffs on products sent in the course of interstate trade or
commerce
o All of these taxes’ net proceeds do not go into the Consolidated Fund of
India (CFI).
o According to the principles established by the Parliament, they are
assigned to the involved states

 Imposition and collection of Goods and Services Tax in line with interstate
trade or commerce (Article 269- A):
o The Centre imposes and collects the Goods and Services Tax (GST) on
supplies made in the course of interstate trade or commerce
o However, this tax is split between the Centre and the States in the
manner proposed by Parliament based on the GST Council’s
recommendations
o Furthermore, the Parliament has the authority to develop standards for
establishing the site of supply and when commodities or services, or
both, are supplied in the course of interstate trade or commerce

13
  Taxes imposed and collected by the Centre but distributed amongst the Centre
and the States proportionately (Article 270):
This category comprises all taxes and duties referred to in the Union List
except the following:
o Articles 268, 269, and 269-A deal with duties and taxes (mentioned
above).
o Article 271 imposes a surcharge on taxes and duties (mentioned below).
o Any tax imposed for a specified purpose. The President, on the
recommendation of the Finance Commission, prescribes the method for
distributing the net earnings of all these taxes and duties (FCs).

 Article 271-Surcharges on certain taxes and duties for purposes of the centre
o Articles 269 and 270 of the Constitution provide that the Parliament
may impose surcharges on taxes and duties at any time (mentioned
above).
o The Centre receives all of the profits from such surcharges. In other
words, the states aren’t paying any of the levies. This fee is not
applicable to the Goods and Services Tax (GST). To put it another way,
the GST will not be subject to this surcharge.
o State Government Taxes: Taxes of this nature are entirely the
responsibility of the governments. They are 18 in number and are
included on the State List.

Inclusion of Residuary Power in the Fiscal Power (Qn. 1 – Pg. 3-4)

 The Parliament has the authority to charge the union list taxes
 The state legislature has sole authority to impose the taxes listed in the State
List.
 The Concurrent List enumerates the taxes that can be levied by both the
Parliament and the state legislatures
 The Parliament has the residuary power of taxation (i.e., the authority to
impose taxes not listed in any of the three lists). The parliament may levy a gift
tax, a wealth tax or an expenditure tax under this article
 There are no tax entries available on the concurrent list. In terms of tax
legislation, the concurrent jurisdiction is inaccessible. However, the 101 st
Amendment Act of 2016 provided an exemption by establishing a unique

14
 provision for goods and services tax. The concurrent competence to make
legislators/legislation controlling goods and services tax has been given to
parliament and state legislatures by this amendment

Restriction of fiscal powers – taxation power

 Article 286 (Restriction on power of the states to levy taxes)
o a state legislature is barred from levying a tax on the supply of goods or
services or both, under the following two situations:
 When such supply occurs outside the state; and
 Where such supply occurs during the export or import process.
o Only parliament can lay down principles to ascertain when a
sale/purchase takes place during export or import or outside the state.
(Sections 3, 4, 5 of the Central Sales Tax Act, 1956 have been
constituted with these powers)
o Taxes on sale/purchase of goods that are of special importance can be
restricted by the parliament and the State Government can levy taxes on
these goods of special importance subject to the restrictions imposed
under Section 14 and Section 15 of Central Sales Act, 1956

o K. Gopinath v. the State of Kerala (2016)

 Cashew nuts were purchased and imported by the Cashew
Corporation of India from African suppliers and sold by it to
local users after processing it.
 The apex court held that this sale was not in the course of import
and did not come under an exemption of the Central Sales Tax
Act, 1956.
 The issue before the court was to decide whether the purchases
of raw cashew nuts from African suppliers made by the
appellants from the cashew corporation of India) fall under the
nature of import and, therefore protected from liability to tax
under Kerala General Sales Tax Act, 1963.
 The judgement here went against the appellants

 The usage or sale of electricity is subject to a tax imposed by the state

legislature. However, no tax could be levied on the sale or use of electricity,
which is:

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 o Consumed by the union or sold to the union; or
o Consumed in the construction, maintenance, or operation of any
railway by the union or by the concerned railway company or sold to
the union or the railway company for a similar purpose.
 Any authority established by Parliament for controlling or developing any
interstate river or river valley shall charge a tax on any water or power stored,
generated, consumed, distributed, or sold by a state legislature. However, in
order for legislation to be effective, it must be reserved for the President’s
consideration and approval

Restriction of fiscal powers – Borrowings

 Article 292 and 293
o Empowers the Government of India to borrow upon the security of the
Consolidated Fund of India, i.e., the resources of the Union, subject
only to such limitations as Parliament by law may impose.
o The Government of India can borrow internally as well as externally.
o States too are empowered to borrow under Article 293.
o According to this Article, a State cannot borrow outside India. The
borrowing powers of the States are limited.
o Furthermore, if a State is indebted to the Union (as every State is now),
it may not resort to further borrowing without the prior consent of the
Central Government.
o The scheme of distribution of resources and of functions makes the
State governments inevitably dependent upon the Central financial
transfers

Inter-Government Tax Immunities

 Article 285
o grants immunity to the property and income of the central and state
governments from Union taxes.
o It ensures that the properties owned by the central and state
governments are not subject to taxation by the Union government.

 Article 286
o lays down certain restrictions on the power of the Union and state
governments to impose taxes on the sale or purchase of goods.

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 o It provides that no law of a state shall impose, or authorise the
imposition of, a tax on the sale or purchase of goods where such sale or
purchase takes place outside the state or in the course of import/export.

 Article 287
o grants immunity to the property and income of a state from state taxes.
o It ensures that the properties owned by a state government are not
subject to taxation by that state.

 Article 288
o exempts the property of the Union or a state from any tax on electricity.
o It ensures that electricity generated or supplied by the government is
not subject to taxation.

 Article 289
o provides exemptions to a state or any of its municipalities or other local
authorities from certain Union taxes on income, property, etc.
o It ensures that the income and property of a state or its local authorities
are not subject to taxation by the Union government.

Fundamental Rights
 Article 27
o prohibition against compelling any person to pay taxes for promotion of
any particular religion

 Right of Minorities
o Section 10(26BB) of the IT Act, 1961
 any income of a corporation established by the Central
Government or any State Government for promoting the
interests of the members of a minority community

o Donations under 80(G)

 Donations made to the above corporation or for repairs or
renovation of any notified temple, mosque, gurudwara, church,
or other places is eligible for 50% deduction subject to 10% of
adjusted gross total income

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18
Double taxation
 Double taxation is a situation where an income is subject to tax twice.
 This can occur in one of two ways
o economic or
o juridical.
 Economic double taxation occurs if an income or a part of it is taxed twice in
the same country, in the hands of two individuals.
 Alternatively, Juridical double taxation occurs if income earned outside India
is taxed two times in the hands of the same individual, once abroad and once in
their home country. This unique situation puts an undue burden on the taxpayer
when their income is taxed twice.

 Types of Double Taxation

o Corporate Double Taxation
 This refers to the taxation on corporate profits through corporate
taxation and dividend taxation (imposed on dividend pay-outs)

o International Double Taxation

 This refers to the taxation of foreign income in both the country
where the income is derived and the country where the investor
resides

 DTAA (Double Taxation Avoidance Agreement)

o It is a tax treaty that India signs with another country in order to avoid
double taxation.
o Using this treaty, an individual can avoid being taxed twice.
o DTAAs can either be comprehensive agreements, which cover all types
of income, or specific agreements, which target only certain types of
income.
o For instance, there is a DTTA (Double Taxation Avoidance Agreement)
between India and Singapore under which income is taxed based on the
residential status of the individual.
o This streamlines the flow of taxation and ensures that the individual is
not taxed twice for the income earned outside India.
o Currently, India has DTAAs in place with more than 80 countries

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 o DTAA allows for a rebate, not a total deduction, NRIs can decrease
their tax implications when they earn income in India
 Relief Against Double Taxation (Income Tax Act)
o The Income Tax Act 1961 contains two Sections (Section 90 and
Section 91) that provide relief from double taxation.
 Bilateral Relief Covered Under Section 90
 Unilateral relief Covered Under Section 91

o Section 90 (Bilateral Relief)

 Exemption Method
 if an income earned outside India has been taxed in the
relevant foreign country, it is not subject to tax in India

 Tax Credit Method

 the individual or the corporation can claim a tax credit
(deduction) for the taxes paid outside India.
 This tax credit can be utilized to set-off the tax payable in
India, thereby reducing the assessee’s overall tax liability

o Section 91 (Unilateral Relief)

 an individual can be relieved of being taxed twice by the
government, irrespective of whether there is a DTAA between
India and the foreign country in question or not
 However, there are certain conditions that have to be satisfied in
order for an individual to be eligible for unilateral relief
 Conditions
 The individual or corporation should have been a resident
of India in the previous year.
 The income should have been accrued to the taxpayer
and received by them outside India in the previous year.
 The income should have been taxed both in India and in
the country with which there is no DTAA.
 The individual or corporation should have paid tax in that
foreign country

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