central state financial relation.pdf

The center-state financial relations in India is governed by the principles outlined in the Constitution of India. It delineates the distribution of financial powers and responsibilities between the central government (Union) and the state governments.
The key features of the center-state financial relations include:
Division of Powers:
The Seventh Schedule of the Constitution categorizes subjects into three lists – the Union List, the State List, and the Concurrent List. The Union List includes subjects on which only the central government can legislate, while the State List includes subjects within the exclusive domain of the state governments.
Financial Powers:
The central government has the authority to levy taxes on subjects in the Union List, while the state governments have the power to levy taxes on subjects in the State List. Concurrent List subjects allow both the center and the states to levy taxes.
Distribution of Taxes:
The Constitution provides for the distribution of tax revenues between the center and the states. Taxes levied by the center (e.g., income tax, customs duties) are collected by the central government, and a portion is shared with the states through mechanisms like the Finance Commission.
Finance Commission:
The Finance Commission is a constitutional body that is appointed every five years to recommend the distribution of net proceeds of taxes between the center and the states. It also suggests the principles for sharing non-tax revenues and grants-in-aid.

1. Centre-statefinancialrelationsinIndia
Thecenter-statefinancialrelationsinIndiaisgovernedbytheprinciplesoutlinedin
theConstitutionofIndia.Itdelineatesthedistributionoffinancialpowersand
responsibilitiesbetweenthecentralgovernment(Union)andthestate
governments.
Thekeyfeaturesofthecenter-statefinancialrelationsinclude:
1.DivisionofPowers:
●TheSeventhScheduleoftheConstitutioncategorizes
subjectsintothreelists–theUnionList,theStateList,and
theConcurrentList.TheUnionListincludessubjectson
whichonlythecentralgovernmentcanlegislate,whilethe
StateListincludessubjectswithintheexclusivedomainof
thestategovernments.
2.FinancialPowers:
●Thecentralgovernmenthastheauthoritytolevytaxeson
subjectsintheUnionList,whilethestategovernmentshave
thepowertolevytaxesonsubjectsintheStateList.
ConcurrentListsubjectsallowboththecenterandthe
statestolevytaxes.
3.DistributionofTaxes:

2. ●TheConstitutionprovidesforthedistributionoftax
revenuesbetweenthecenterandthestates.Taxesleviedby
thecenter(e.g.,incometax,customsduties)arecollected
bythecentralgovernment,andaportionissharedwiththe
statesthroughmechanismsliketheFinanceCommission.
4.FinanceCommission:
●TheFinanceCommissionisaconstitutionalbodythatis
appointedeveryfiveyearstorecommendthedistributionof
netproceedsoftaxesbetweenthecenterandthestates.It
alsosuggeststheprinciplesforsharingnon-taxrevenues
andgrants-in-aid.
5.Grants-in-Aid:
●Thecentralgovernmentprovidesgrantstostatesbasedon
recommendationsfromtheFinanceCommission.These
grantscanbeintheformofrevenuegrants,grantsforlocal
bodies,orspecific-purpose grantstoaddressregional
imbalances.
6.ConsolidatedFund:
●BoththecenterandthestatesmaintainConsolidatedFunds
intowhichallrevenuesarecredited,andallexpenditures
aredebited.Therevenuescollectedbyeachlevelof
governmentarespentbasedontheirrespectivepowersand
responsibilities.
7.Inter-StateCouncil:
●TheInter-StateCouncilisaconstitutionalbodythat
facilitatescooperativefederalismbypromoting
coordinationbetweenthecenterandthestatesonvarious
issues,includingeconomicandfinancialmatters.
8.GoodsandServicesTax(GST):
●TheintroductionofGSTinIndiahastransformedthe
indirecttaxstructure.GSTisacomprehensive,
destination-basedtaxleviedatboththecentralandstate
levels.Therevenueissharedbetweenthecenterandthe
statesthroughtheGSTCouncil.
9.BorrowingPowers:
●Boththecenterandthestateshavethepowertoborrow
money.However,thecentralgovernmentgenerallyhas
greaterflexibilityandaccesstofinancialmarketscompared
toindividualstates.
10.ControloverExpenditure:
●Thecentralgovernmenthascontrolovercertain
expenditures,especiallythoserelatedtodefense,external

3. affairs,andcentrallysponsoredschemes.State
governmentshavecontroloverexpendituresrelatedto
subjectsintheStateList.
11.PlanningandDevelopment:
●ThePlanningCommission,replacedbyNITIAayog,playeda
roleincoordinatingplanninganddevelopmentactivities
betweenthecenterandthestates.NITIAayogcontinuesto
playacoordinatingroleinfosteringcooperativefederalism.
12.EmergencyProvisions:
●Duringafinancialemergency,thePresidentofIndiacan
givedirectionstothestatesonfinancialmatters.However,
suchsituationsareexceptionalandaresubjectto
parliamentaryapproval.
Thecenter-statefinancialrelationshipisdynamic,andamendmentstothe
Constitution,aswellaschangesineconomicpolicies,caninfluencethefiscal
federalismlandscapeinIndia.Cooperativefederalismisakeyprincipleaimedat
fosteringcollaborationbetweenthecenterandthestatesforbalancedand
inclusivedevelopment.

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