Centre-State Relations – UPSC Notes – Indian Polity

Table of Contents

The Constitution of India is like a rulebook that divides powers between the national government (Centre) and the state governments. This includes making laws, running the government, and handling money. Unlike the other powers, the judicial power is not divided; instead, there’s one system to enforce laws made by both the national and state governments. Read our article on Centre-State Relations!

Even though the Centre and states have their own areas where they are in charge, it’s super important for them to work together smoothly. The Constitution has a bunch of rules to make sure they cooperate well. We can look at their relations in three ways:

  1. Legislative relations: This is about who gets to make laws on what topics.
  2. Administrative relations: This involves how the Centre and states work together in running the government.
  3. Financial relations: This is about how money is shared and managed between the national and state governments.

Centre-State RelationsLegislative Relations: Understanding How Laws are Made

In the Constitution of India, specifically Articles 245 to 255 in Part XI, we find information about how laws are made and managed between the national government (Centre) and the state governments. Some other articles talk about the same thing.

Similar to other federal constitutions, the Indian Constitution divides the power to make laws between the Centre and the states. This division applies to both the area covered (territory) and the topics of legislation (subjects). Additionally, the Constitution allows the national government to make laws in the state’s domain under specific situations and gives the Centre some control over state laws in certain cases.

So, when we talk about legislative relations between the Centre and the states, there are four important aspects to consider:

  1. Territorial extent of Central and state legislation: This is about where the laws made by the national and state governments apply.
  2. Distribution of legislative subjects: This refers to which level of government has the authority to make laws on specific topics.
  3. Parliamentary legislation in the state field: This involves situations where the national government can make laws for the states under certain conditions.
  4. Centre’s control over state legislation: This relates to how the national government has some influence over the laws made by the states in specific cases.

Territorial Reach of Laws: Where Rules Apply

The Constitution defines where the national government (Centre) and state governments can make laws. Here’s how it works:

  1. Parliament’s Authority: The Parliament can create laws for the entire country or just a specific part of India. This includes states, union territories, and any other area considered part of India.
  2. State Legislature Authority: State legislatures can make laws for the whole state or only certain parts of it. However, laws created by a state legislature usually apply only within that state, unless there’s a strong connection between the state and the matter at hand.
  3. Extra-Territorial Legislation: Only the Parliament can make laws that apply outside India. This means laws passed by the Parliament can affect Indian citizens and their property anywhere in the world.

Despite these powers, there are some limits set by the Constitution:

  • The President can create regulations for peace and good governance in certain Union Territories (like Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli, Daman and Diu). These regulations have the same power as laws made by Parliament.
  • The Governor can decide that a law made by Parliament doesn’t apply to specific areas in the state or applies with changes and exceptions.
  • In Assam, the Governor can also decide that a law made by Parliament doesn’t apply to tribal areas (autonomous districts) or applies with changes and exceptions. Similar powers are held by the President for tribal areas in Meghalaya, Tripura, and Mizoram.

Division of Legislative Powers: Who Makes Laws on What

In our Constitution, laws are divided into three main categories – Union List, State List, and Concurrent List, all listed in the Seventh Schedule:

  1. Union List (List-I): The Parliament has exclusive power to make laws on these matters, like defense, banking, foreign affairs, and more. There are currently 100 subjects in this list.
  2. State List (List-II): State legislatures have the primary power to make laws on these subjects, such as public order, police, agriculture, and local government. There are presently 61 subjects in this list.
  3. Concurrent List (List-III): Both the Parliament and state legislatures can make laws on these matters, including criminal law, marriage and divorce, labor welfare, and more. Currently, there are 52 subjects in this list. In 1976, the 42nd Amendment Act moved five subjects from the State List to the Concurrent List.

The Parliament also has the power to make laws on subjects not covered in these lists, known as residuary subjects. This includes the authority to impose residuary taxes.

These lists are designed to ensure that matters of national importance and those requiring consistent laws across the country are in the Union List. Regional and local matters, allowing for diverse interests, are in the State List. The Concurrent List includes matters where both uniformity and diversity are possible.

Comparatively, in the United States, only the federal government has enumerated powers, and the states have residuary powers. In Australia, it’s a single enumeration of powers like in the U.S., while Canada follows a double enumeration system with residuary powers at the federal level.

When there’s a conflict between lists:

  • Union List prevails over State List and Concurrent List.
  • Concurrent List prevails over State List.
  • In case of conflict between Central and state laws on a Concurrent List subject, the Central law usually prevails. However, if the state law is reserved for the President’s consideration and gets approval, it can prevail in that state, but the Parliament can still override it later.

Parliamentary Legislation in the State Field: Special Circumstances

The usual distribution of legislative powers between the national government (Centre) and the states is designed to be consistent. However, under certain circumstances, the Constitution allows modifications or suspension of this distribution. The Parliament has the authority to make laws on matters listed in the State List under five exceptional situations:

  1. Resolution by Rajya Sabha:
    • If the Rajya Sabha declares that it’s in the national interest for Parliament to make laws on a State List matter, Parliament gains the competence to do so.
    • The resolution needs support from two-thirds of the present and voting members, remaining in force for one year, renewable but not exceeding one year at a time.
    • Laws cease to be effective six months after the resolution expires.
    • State legislatures can still make laws on the same matter, but in case of inconsistency, the parliamentary law prevails.
  2. National Emergency:
    • During a national emergency, Parliament can legislate on State List matters.
    • Laws become inoperative six months after the emergency ends.
    • State legislatures retain the power to make laws on the same matters, but if there’s a conflict, the parliamentary law takes precedence.
  3. States Make a Request:
    • If legislatures of two or more states request Parliament to enact laws on a State List matter, Parliament can do so, and the law applies only to those states.
    • Other states can adopt it later by passing a resolution.
    • Only Parliament can amend or repeal the law, not the state legislatures.
    • Passing such a resolution relinquishes the state legislature’s power on that matter, giving full authority to Parliament.
  4. Implementing International Agreements:
    • Parliament can make laws on State List matters to fulfill international obligations and commitments arising from treaties, agreements, or conventions.
    • Examples include laws related to United Nations privileges, Geneva Convention, anti-hijacking, and environmental regulations.
  5. During President’s Rule:
    • When President’s rule is imposed in a state, Parliament gains the power to make laws on State List matters related to that state.
    • The law remains in force even after the end of President’s rule but can be repealed, altered, or re-enacted by the state legislature.

Centre’s Control Over State Legislation: Ensuring Harmony

Apart from the Parliament’s authority to directly legislate on state subjects under exceptional situations, the Constitution grants the Centre control over state legislative matters in the following ways:

  1. Reservation of Bills:
    • The governor can reserve certain types of bills passed by the state legislature for the consideration of the President.
    • The President holds absolute veto power over these reserved bills.
  2. Sanction for Specific Bills:
    • Bills on certain matters listed in the State List require prior sanction from the President before they can be introduced in the state legislature. For instance, bills imposing restrictions on the freedom of trade and commerce.
  3. Direction on Money Bills:
    • During a financial emergency, the President can instruct states to reserve money bills and other financial bills passed by the state legislature for his consideration.

Centre-State Relations – Administrative Relations: Understanding How Decisions are Made

In our Constitution, Articles 256 to 263 in Part XI discuss how the national government (Centre) and state governments work together. There are also other articles related to the same topic.

Distribution of Executive Powers:

The authority to make decisions and carry out actions, known as executive power, is split between the Centre and states, similar to how legislative powers are divided. Here’s how it works:

  • Centre’s Executive Power: The national government’s decision-making authority covers the entire country, especially for matters that only the Parliament can make laws on (like subjects listed in the Union List) and for handling rights, authority, and jurisdiction from treaties or agreements.
  • State’s Executive Power: Each state has decision-making authority within its borders, particularly for matters that only the state legislature can make laws on (like subjects listed in the State List).
  • Shared Executive Power: For matters where both the Parliament and state legislatures can make laws (subjects listed in the Concurrent List), states usually handle the decision-making unless the Constitution or a law specifically gives that power to the Centre. So, even if the Parliament makes a law on a shared subject, the states usually carry it out unless there are specific directions from the Constitution or the Parliament saying otherwise.

Responsibilities of States and the Centre: A Quick Overview

The Constitution has set two rules for how state governments should operate. This is done to make sure the national government (Centre) has the freedom to use its powers without any restrictions. Here’s what the rules say:

  1. Complying with Laws:
    • Every state must use its executive power to follow the laws made by the Parliament and any existing laws that apply in the state.
  2. Not Hindering Centre’s Power:
    • States must use their executive power in a way that doesn’t stop or harm the Centre’s executive power in the state.

In both cases, the Centre can give directions to the state if needed. These directions have a strong, forceful nature. For example, Article 365 states that if a state doesn’t follow the Centre’s directions, the President can decide that the state’s government can’t function according to the Constitution. In such a situation, the President can impose President’s rule in the state under Article 356.

Centre’s Guidance to the States: Additional Areas

Apart from the earlier mentioned cases, the Centre has the authority to provide directions to the states concerning how they should use their executive power in specific matters:

  1. Communication Infrastructure:
    • States can receive directions on the construction and upkeep of communication means considered crucial for national or military purposes.
  2. Railway Protection:
    • States may be directed on the measures necessary to safeguard the railways within their borders.
  3. Language Education Facilities:
    • Guidance can be given on ensuring sufficient opportunities for instruction in the mother tongue at the primary education level, especially for children from linguistic minority groups in the state.
  4. Welfare Schemes for Scheduled Tribes:
    • Specific directions may be issued regarding the planning and implementation of welfare schemes intended for the well-being of Scheduled Tribes within the state.

In all these instances, the coercive measures outlined in Article 365 (mentioned earlier) can be applied if the states fail to comply with the directions from the Centre.

Sharing Responsibilities Between Centre and States

The way legislative powers are divided between the Centre and the states is fixed and cannot be changed easily. Unlike legislative powers, executive powers usually follow a similar division, but it can sometimes lead to conflicts between the Centre and the states. To avoid problems and inflexibility, the Constitution allows the sharing of executive functions between the national government and state governments.

Here’s how it works:

  1. Delegating Executive Functions:
    • The President, with the agreement of a state government, can assign some of the national government’s executive functions to that state.
    • Similarly, the governor of a state, with the agreement of the national government, can assign some state executive functions to the national government.
  2. Conditional or Unconditional Delegation:
    • This sharing of administrative functions can happen with or without certain conditions.
  3. Delegation Without State’s Consent:
    • In some cases, the Parliament (not the President) can pass a law to give some national executive functions to a state, even if the state doesn’t agree.
    • However, a state legislature doesn’t have the power to do the same.

Mutual Delegation – Working Together: Centre and States Cooperation

Our Constitution has certain rules to make sure the national government (Centre) and state governments work together smoothly:

  1. Resolving Water Disputes:
    • The Parliament has the power to settle any argument or issue about using, sharing, and controlling water from rivers that flow through multiple states.
  2. Inter-State Council:
    • The President, as per Article 263, can create an Inter-State Council. This council looks into and talks about matters that are important for both the Centre and the states. This council was established in 1990.
  3. Recognizing Each Other’s Actions:
    • Any action, official records, or decisions made by the Centre or any state should be respected and accepted all across India.
  4. Freedom of Trade and Commerce:
    • The Parliament can pick a suitable authority to make sure that the rules about free trade and commerce between states are followed. However, such an authority hasn’t been chosen yet.

All-India Services: Connecting Centre and States

In our country, both the Centre and states have their own public services – Central Services and State Services. Additionally, there are special services known as All-India Services, which include IAS, IPS, and IFS. People in these services hold important positions under both the Centre and states, but they are selected and trained by the Centre.

Here’s how it works:

  • Control and Structure:
    • All-India Services are managed jointly by the Centre and states. The Central government has the ultimate say, but day-to-day management is in the hands of state governments.
  • Origin and Expansion:
    • In 1947, ICS became IAS, and IP transformed into IPS, recognized by the Constitution as All-India Services. Later, in 1966, IFS joined as the third All-India Service. The Constitution allows the Parliament to create new All-India Services based on a resolution from Rajya Sabha.
  • Unified Services:
    • Each All-India Service, even if its members work in different states, is a single service with common rights, status, and pay scales throughout the country.
  • Debate and Justification:
    • While some argue that All-India Services challenge the federalism principle by limiting state autonomy, they are supported because they (i) maintain high administrative standards, (ii) ensure consistency in the administrative system nationwide, and (iii) promote collaboration between the Centre and states on common issues.

Dr. B R Ambedkar, during the making of our Constitution, justified All-India Services, saying they provide a solution for maintaining administrative standards, especially for strategic positions, without taking away states’ rights to have their civil services.

Public Service Commissions: Bridging Centre and States

When it comes to public service commissions, the connection between the Centre and states is as follows:

  1. State Public Service Commission:
    • The Chairman and members of a state public service commission, appointed by the state governor, can only be removed by the President.
  2. Joint State Public Service Commission (JSPSC):
    • The Parliament can create a Joint State Public Service Commission (JSPSC) for two or more states if the state legislatures request it. The chairman and members of the JSPSC are appointed by the President.
  3. Union Public Service Commission (UPSC):
    • The UPSC can help a state, upon the request of the state governor and with the approval of the President.
  4. Assistance in Joint Recruitment:
    • The UPSC assists states, when requested by two or more states, in developing and operating joint recruitment schemes for services requiring candidates with special qualifications.

Integrated Judicial System

In India, even though there are separate governments at the Centre and in the states, there is no separate system for delivering justice. The Constitution, instead, set up a single judicial system with the Supreme Court at the top and state high courts below it. This unified system handles both national and state laws, aiming to remove differences in how legal matters are dealt with.

Here’s a breakdown:

  1. Judicial Hierarchy:
    • The Supreme Court stands at the highest level, and beneath it are the state high courts. This one system of courts is responsible for applying both national and state laws.
  2. Appointment and Control of State High Court Judges:
    • Judges for state high courts are chosen by the president after consulting with the Chief Justice of India and the state governor. The president holds the power to transfer or remove them.
  3. Common High Court for Multiple States:
    • The Parliament has the authority to create a shared high court for two or more states. For instance, Maharashtra and Goa or Punjab and Haryana share a common high court.

Relations During Emergencies

  1. National Emergency (Article 352):
    • When a national emergency is in effect, the Centre gains the authority to issue executive directions to a state on any matter. This means the state governments come under the complete control of the Centre, although they are not suspended.
  2. President’s Rule (Article 356):
    • In a situation where President’s Rule is imposed in a state, the President can take over the functions of the state government and wield the powers usually held by the Governor or any other executive authority in the state.
  3. Financial Emergency (Article 360):
    • During a financial emergency, the Centre can instruct the states to follow financial rules, and the President can issue other necessary directions, including reducing the salaries of people working in the state and high court judges.

Additional Measures for Centre’s Oversight

The Constitution includes further provisions that grant the Centre control over state administration:

  1. Article 355 Responsibilities:
    • Article 355 places two responsibilities on the Centre: (a) safeguarding every state against external threats and internal disturbances, and (b) ensuring that the government of every state follows the rules laid out in the Constitution.
  2. Governor’s Appointment and Role:
    • The president appoints the governor of a state, and the governor serves at the pleasure of the President. Besides being the constitutional head of the state, the governor also acts as a representative of the Centre in the state. Periodic reports on state administrative matters are submitted by the governor to the Centre.
  3. State Election Commissioner’s Authority:
    • Although appointed by the state governor, the state election commissioner can only be removed by the President.

Extra-Constitutional Devices

Apart from the constitutional methods mentioned earlier, there are informal approaches to enhance cooperation and coordination between the Centre and the states. These involve various advisory bodies and meetings held at the national level.

  1. Non-Constitutional Advisory Bodies:
    • These include entities such as the Planning Commission (now NITI Aayog), the National Development Council, the National Integration Council, the Central Council of Health, the Central Council of Local Government and Urban Development, the Zonal Councils, the North-Eastern Council, the Central Council of Indian Medicine, Central Council of Homoeopathy, the Central Family Welfare Council, the Transport Development Council, and the University Grants Commission.
  2. Important Conferences:
    • Annual or periodic conferences serve as platforms for discussions between the Centre and the states on various matters. These include:
      • Governors’ Conference (Presided over by the President).
      • Chief Ministers’ Conference (Presided over by the Prime Minister).
      • Chief Secretaries’ Conference (Presided over by the Cabinet Secretary).
      • Conference of Inspector-General of Police.
      • Chief Justices’ Conference (Presided over by the Chief Justice of India).
      • Conference of Vice-Chancellors.
      • Home Ministers’ Conference (Presided over by the Central Home Minister).
      • Law Ministers’ Conference (Presided over by the Central Law Minister).

Financial Relations Between Centre and States

Introduction: Financial relations between the Centre and the states are outlined in Articles 268 to 293 of Part XII of the Constitution, along with other relevant provisions. This can be broadly categorized into the allocation of taxing powers.

Taxing Powers Division:

Exclusive Powers:

  • Parliament has the sole authority to levy taxes on subjects listed in the Union List (15 items).
  • State legislatures have exclusive power to impose taxes on subjects mentioned in the State List (20 items).
  • Both Parliament and state legislatures can levy taxes on subjects listed in the Concurrent List (3 items).
  • Parliament holds the residual power to impose taxes not listed in any of the three lists, including gift tax, wealth tax, and expenditure tax.

Proceeds of Tax Division:

  • The Constitution distinguishes between the power to levy and collect a tax and the authority to allocate the collected tax proceeds. For instance, while income tax is collected by the Centre, its proceeds are shared between the Centre and the states.

Restrictions on State Taxing Powers:

  1. Professions and Trades Tax:
    • States can impose taxes on professions, trades, callings, and employments, but the total amount should not exceed Rs. 2,500 per annum for any individual.
  2. Sales Tax Restrictions:
    • States can impose taxes on the sale or purchase of goods (excluding newspapers) but with limitations:
      • No tax on transactions outside the state.
      • No tax on transactions related to import/export.
      • No tax on transactions in the course of inter-state trade and commerce.
      • Tax on goods deemed crucial in inter-state trade is subject to Parliament’s specified restrictions.
  3. Electricity Tax:
    • States can impose taxes on the consumption or sale of electricity but with restrictions:
      • No tax on electricity consumed or sold to the Centre.
      • No tax on electricity used in railway construction, maintenance, or operation for the Centre or a railway company.
  4. Water and Electricity Tax:
    • States can tax water or electricity related to inter-state river or valley development, but the law requires the President’s consideration and assent to be effective.

Distribution of Tax Revenues: Recent Changes Explained

Significant modifications have been made in the distribution of tax revenues between the Centre and the states through the 80th Amendment of 2000 and the 88th Amendment of 2003. These changes have reshaped how income from certain central taxes and duties is allocated.

80th Amendment (2000):

  • Enacted to implement the recommendations of the 10th Finance Commission.
  • Suggested a new scheme, termed the ‘Alternative Scheme of Devolution.’
  • Under this scheme, 29% of the total income from specific central taxes and duties is allocated to the states.
  • This scheme became effective retrospectively from April 1, 1996.
  • Central taxes like Corporation Tax and Customs Duties are now on par with Income Tax regarding their sharing with the states.

88th Amendment (2003):

  • Introduces a new Article 268-A focusing on service tax.
  • Adds a fresh subject in the Union List – entry 92-C (taxes on services).
  • While imposed by the Centre, service tax is collected and shared by both the Centre and the states.

Current Scenario: After these amendments, the current distribution of tax revenues operates as per the following framework.

Analysis of Centre–State Financial Relations

A. Taxes Levied by the Centre but Collected and Appropriated by the States (Article 268):

  1. Stamp Duties: Imposed on various financial instruments, including bills of exchange, cheques, and policies of insurance.
  2. Excise Duties: Applied to medicinal and toilet preparations containing alcohol and narcotics.
  3. Assignment to States: The proceeds of these levies, executed within a state, do not contribute to the Consolidated Fund of India; instead, they are designated to the respective state.

B. Service Tax Levied by the Centre but Collected and Appropriated by the Centre and the States (Article 268-A):

  1. Tax on Services: Levied by the Centre, with proceeds both collected and appropriated jointly by the Centre and states.
  2. Parliamentary Formulation: Principles governing collection and appropriation devised by the Parliament.

C. Taxes Levied and Collected by the Centre but Assigned to the States (Article 269):

  1. Interstate Trade Taxes: Covers taxes on the sale or purchase of goods and consignment of goods in inter-state trade or commerce.
  2. Assignment to States: Net proceeds do not contribute to the Consolidated Fund of India, instead, assigned to states as per Parliament’s principles.

D. Taxes Levied and Collected by the Centre but Distributed between the Centre and the States (Article 270):

  1. Comprehensive Inclusions: All taxes and duties from the Union List, excluding specified ones.
  2. Distribution Mechanism: The President, upon the Finance Commission’s recommendation, prescribes the mode of distribution for net proceeds.

E. Surcharge on Certain Taxes and Duties for Purposes of the Centre (Article 271):

  1. Surcharge Levied: Parliament can impose surcharges on taxes and duties from Articles 269 and 270.
  2. Exclusive Allocation: The proceeds from surcharges are allocated exclusively to the Centre, devoid of any state participation.

F. Taxes Levied and Collected and Retained by the States:

  1. Exclusive State Taxes: Twenty taxes outlined in the State List, including land revenue, agricultural income tax, and excise duties on specific items.
  2. Range of Taxes: Spanning from direct levies on land and income to indirect taxes on goods, services, and entertainment.
  3. Financial Autonomy: States retain full control and utilization of revenue generated from these taxes.

Distribution of Non-tax Revenues

A. Centre’s Non-tax Revenues: The major sources of non-tax revenues for the Centre include:

  1. Posts and Telegraphs: Income generated from postal and telecommunication services.
  2. Railways: Revenue collected from the operation and management of the railway system.
  3. Banking: Income derived from the central banking activities.
  4. Broadcasting: Funds obtained through broadcasting services.
  5. Coinage and Currency: Revenue generated from the production and circulation of coins and currency.
  6. Central Public Sector Enterprises: Income earned from enterprises owned and operated by the central government.
  7. Escheat and Lapse: Funds acquired through unclaimed assets and expired financial instruments.

B. States’ Non-tax Revenues: The major sources of non-tax revenues for the states include:

  1. Irrigation: Income generated from irrigation services and facilities.
  2. Forests: Revenue collected from forest-related activities and resources.
  3. Fisheries: Funds obtained from activities related to fishing and aquatic resources.
  4. State Public Sector Enterprises: Income earned from enterprises owned and operated by the state government.
  5. Escheat and Lapse: Funds acquired through unclaimed assets and expired financial instruments.

Grants-in-Aid to the States

In addition to sharing taxes, the Constitution allows for grants to states from Central resources. There are two types: statutory grants and discretionary grants.

Statutory Grants:

  • Article 275 empowers Parliament to provide financial assistance to states in need.
  • Specific grants are given for the welfare of scheduled tribes or the administration of scheduled areas.
  • Recommended by the Finance Commission, these grants are charged to the Consolidated Fund of India.

Discretionary Grants:

  • Article 282 allows both Centre and states to make grants for any public purpose, beyond their legislative competence.
  • Known as discretionary grants, they serve the dual purpose of helping states meet financial goals and giving the Centre influence to coordinate state actions.

Note: Discretionary grants are a significant part of Central grants to states, outweighing statutory grants.

Other Grants:

  • Temporary grants were provided for Assam, Bihar, Orissa, and West Bengal states instead of export duties on jute and jute products.
  • Lasting for ten years from the Constitution’s commencement, Finance Commission recommendations determined these grants, charged to the Consolidated Fund of India.

Finance Commission

The Finance Commission, established by the President every five years or earlier, acts as a quasi-judicial body, guided by Article 280. It is tasked with making recommendations on several key matters:

  1. Distribution of Tax Proceeds:
    • Deciding how the net proceeds of taxes are shared between the Centre and the states.
    • Allocating the respective shares of these proceeds among the states.
  2. Principles for Grants-in-Aid:
    • Defining the principles that should govern grants-in-aid to states by the Centre, which are sourced from the Consolidated Fund of India.
  3. Consolidated Fund Augmentation:
    • Recommending measures to boost the Consolidated Fund of a state, in line with the suggestions of the State Finance Commission.
    • Supplementing resources for panchayats and municipalities in the state.
  4. Additional Matters:
    • Addressing any other issue referred to it by the President in the interest of sound finance.

Historically, until 1960, the Commission also determined the amounts paid to specific states—Assam, Bihar, Orissa, and West Bengal—as compensation for not receiving a share of the net proceeds from the export duty on jute and jute products each year.

Safeguarding States’ Interests in Finances

In order to safeguard the financial interests of states, the Constitution specifies that certain bills can only be introduced in Parliament upon the President’s recommendation. These bills include:

  1. Tax or Duty Bills:
    • Bills that impose or modify any tax or duty affecting states.
  2. Agricultural Income Definition Bills:
    • Bills that alter the definition of ‘agricultural income’ as per Indian income tax laws.
  3. Bills Affecting Distribution Principles:
    • Bills that impact the principles guiding the distribution of funds to states.
  4. Surcharge Bills for Central Purposes:
    • Bills that impose surcharges on specific taxes or duties for the benefit of the Centre.

The term “tax or duty in which states are interested” refers to:

  • A tax or duty whose entire or part of the net proceeds are assigned to any state.
  • A tax or duty based on the net proceeds, from which sums are currently payable from the Consolidated Fund of India to any state.

The phrase ‘net proceeds’ indicates the earnings from a tax or duty after deducting the collection costs. The Comptroller and Auditor-General of India is responsible for determining and certifying the net proceeds, and his certification is considered final.

Borrowing by the Centre and the States

The Constitution outlines provisions regarding the borrowing powers of both the Centre and the states:

  • Central government: Borrow within India or internationally, security of the Consolidated Fund of India, guarantees, limits defined by the Parliament.
  • State government: Borrow within India (not internationally), security of the Consolidated Fund of the State, guarantees, limits set by the state legislature.
  • Central government: Extend loans, offer guarantees for loans raised by any state, funds charged to the Consolidated Fund of India.
  • State: Restricted from raising a loan without Centre’s consent, outstanding part of a loan, guarantee provided by the Centre.

Inter-Governmental Tax Immunities in the Indian Constitution

Similar to other federal constitutions, the Indian Constitution incorporates the principle of ‘immunity from mutual taxation‘ and outlines specific provisions in this context. These provisions include:

Exemption of Central Property from State Taxation:

The property of the central government is immune from any taxes imposed by a state or any authority within a state, such as municipalities, district boards, panchayats, and the like. However, the Parliament retains the authority to lift this prohibition. The term ‘property‘ encompasses lands, buildings, chattels, shares, debts, and any other items with monetary value, encompassing all types of property—movable or immovable, tangible or intangible. Additionally, this property may be utilized for sovereign purposes (e.g., armed forces) or commercial purposes.

It’s important to note that corporations or companies established by the Central government are not exempt from state or local taxation due to their status as separate legal entities.

Exemption of State Property or Income from Central Taxation:

The property and income of a state enjoy immunity from central taxation. This income may be derived from sovereign functions or commercial activities. However, the central government has the authority to tax the commercial operations of a state if sanctioned by Parliament. Nevertheless, Parliament retains the power to designate specific trades or businesses as incidental to the ordinary functions of the government, exempting them from taxation.

Importantly, the assets and revenue of local authorities located within a state do not enjoy exemption from Central taxation. Similarly, the possessions or earnings of corporations and companies owned by a state can be subject to taxation by the Centre.

In a significant advisory opinion in 1963, the Supreme Court determined that the immunity afforded to a state regarding Central taxation does not encompass duties of customs or excise. Essentially, this implies that the Centre retains the authority to levy customs duties on goods imported or exported by a state and impose excise duties on goods produced or manufactured by a state.

Effects of Emergencies on Centre–State Financial Relations:

In ordinary circumstances, as described earlier, Centre–state financial relations undergo changes during emergencies. These changes are outlined as follows:

National Emergency: During the proclamation of a national emergency (under Article 352), the President holds the authority to modify the constitutional distribution of revenues between the Centre and the states. This implies that the President can either reduce or cancel the transfer of finances, encompassing both tax sharing and grants-in-aid, from the Centre to the states. Such modifications persist until the conclusion of the financial year in which the emergency ceases to operate.

Financial Emergency: When a financial emergency is proclaimed (under Article 360), the Centre is empowered to issue directions to the states. These directions may include: (i) adherence to specified canons of financial propriety; (ii) reduction of salaries and allowances for all classes of persons serving in the state, including high court judges; and (iii) reservation of all money bills and other financial bills for the consideration of the President.

Evolution of Centre–State Relations: Trends and Shifts

Until 1967, Centre–state relations generally remained harmonious, largely attributed to the single-party rule at the Centre and in most states. However, a significant shift occurred in the political landscape during the 1967 elections, where the Congress party suffered defeats in nine states, leading to a weakened position at the Centre.

This altered political scenario marked the onset of a new era in Centre–state relations. Non-Congress governments in the states emerged in opposition to the escalating centralization and intervention by the Central government. The focal point of contention became the issue of state autonomy, with demands for increased powers and financial resources for the states. Consequently, tensions and conflicts arose in Centre–state relations during this period.

Areas of Tension in Centre-State Relations

The issues contributing to tensions and conflicts between the Centre and states encompass:

  1. Mode of appointment and dismissal of governor
  2. Discriminatory and partisan role of governors
  3. Imposition of President’s Rule for partisan interests
  4. Deployment of Central forces in the states for law and order maintenance
  5. Reservation of state bills for the consideration of the President
  6. Discrimination in financial allocations to the states
  7. Role of Planning Commission in approving state projects
  8. Management of All-India Services (IAS, IPS, and IFS)
  9. Use of electronic media for political purposes
  10. Appointment of enquiry commissions against chief ministers
  11. Sharing of finances between Centre and states
  12. Encroachment by the Centre on the State List

Issues in Centre-State relations have been under consideration since the mid-1960s. Noteworthy developments in this regard include the establishment of the Administrative Reforms Commission (ARC) in 1966, chaired by Morarji Desai (later K Hanumanthayya). The ARC, examining Centre–State relations among its terms of references, constituted a study team led by M C Setalvad. Based on the study team’s report, the ARC finalized its recommendations in 1969, making 22 suggestions for enhancing Centre–state relations:

  • Establishment of an Inter-State Council under Article 263 of the Constitution.
  • Appointment of individuals with long experience in public life and administration and a non-partisan attitude as governors.
  • Delegation of powers to the maximum extent to the states.
  • Transfer of more financial resources to the states to reduce dependency on the Centre.
  • Deployment of Central armed forces in the states either on their request or otherwise.

Despite the recommendations, no action was taken by the Central government on the ARC’s suggestions.

Frequently Asked Questions (FAQs) about Centre-State Relations in India:

  1. What is the Constitution of India, and how does it relate to the division of powers between the Centre and states?
    • Answer: The Constitution of India is a rulebook that allocates powers between the national government (Centre) and state governments. It covers areas like legislation, administration, and finance.
  2. How are legislative relations defined between the Centre and states in the Indian Constitution?
    • Answer: Legislative relations involve the power to make laws. In India, legislative relations are detailed in Articles 245 to 255, addressing territorial extent, distribution of subjects, parliamentary legislation in state matters, and Centre’s control over state legislation.
  3. Can you explain the distribution of legislative powers between the Centre and states in India?
    • Answer: Legislative powers are divided into Union List (Centre), State List (states), and Concurrent List (both). The Parliament can legislate on residuary subjects. In case of conflicts, certain rules determine which law prevails.
  4. How does the Constitution define the territorial reach of laws made by the Centre and states?
    • Answer: The Parliament can make laws for the entire country or specific parts, while state legislatures create laws for the entire state or certain areas. Only Parliament can make laws that apply outside India, and there are specific limits set by the Constitution.
  5. What are the exceptional circumstances under which the Parliament can legislate on State List matters?
    • Answer: The Parliament can legislate on State List matters during a national emergency, with Rajya Sabha’s resolution, on states’ request, to fulfill international obligations, and during President’s Rule in a state.
  6. How is the executive power divided between the Centre and states in India?
    • Answer: Executive powers, or decision-making authority, are split between the Centre and states. The Centre handles matters in the Union List, and states manage affairs in the State List. Shared power exists for subjects in the Concurrent List.
  7. What are the two rules set by the Constitution for state governments regarding their executive powers?Answer: States must follow laws made by Parliament and not hinder the Centre’s executive power. The Centre can give directions to states, and failure to comply may lead to President’s rule.
  8. How are responsibilities shared between the Centre and states in terms of public services?
    • Answer: All-India Services like IAS, IPS, and IFS are selected and trained by the Centre but work under both the Centre and states. This ensures high administrative standards and consistency nationwide.
  9. How does the Constitution ensure smooth cooperation between the Centre and states during emergencies?
    • Answer: During emergencies like a national emergency or President’s Rule, the Centre gains control over state functions. The Constitution also allows the Parliament to settle water disputes and establish an Inter-State Council.
  10. What is the integrated judicial system in India, and how does it operate?
    • Answer: India has a single judicial system with the Supreme Court at the top and state high courts below. It applies both national and state laws, ensuring a unified approach to justice across the country.

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