The framers of the Indian constitution perceived the need for a strong Central Government, which would keep the disintegrating forces in check and safeguard the integrity of the counter. This aspect has made the Indian federation a unique one among the federal structures of the world. It is characterized by high degree of centralization. The Indian constitution can be both unitary as well as federal according to the requirements of time and circumstances. The Constitution of India is federal in form but unitary in spirit. The Centre-State relations in the Indian federation can be summed up as follows;

Legislative relations

The Constitution divides legislative authority between the Union and the States in three lists— the Union List, the State List and the Concurrent List. The distribution is remarkably elaborate and detailed. The Union List consists of 99 items. It demonstrates the vast extent as well as the great importance of the powers vested in the Union government. The Union Parliament has exclusive authority to frame laws on subjects enumerated in the list.  These include foreign affairs, defence, armed forces, communications, posts and telegraphs, foreign trade, inter-state trade, commerce, etc. A number of items included in the list have an important bearing on UnionState relations and some of them can enable the Union to expand its area of operation and thereby extend its control over the sphere, which falls under State jurisdiction. For example item number 52, which refers to industry, places a powerful lever in the hands of the Union to take any industry under its own control.

Both the Parliament and the State Legislatures can make laws on subjects given in the concurrent List, but the centre has a prior and superior claim to legislate on concurrent subjects. The list comprises of 52 items including criminal and civil procedure, marriage and divorce, economic and special planning, trade union, labour welfare, electricity, newspapers, books and printing presses, population control and family planning etc.

The state List consisting of 61 items contains subjects on which ordinarily the States along can make laws. These include public order, police, administration of justice, prisons, local government, agriculture etc. However, what makes State autonomy less real than it appears at first is the fact that under certain conditions the Constitution authorizes the Union Government to extend its   over matters formally included in the State List. In fact, when a proclamation or emergency is in operation, Parliament can legislate on matters enumerated in all the three lists. Under Art. 356 relating to the breakdown of constitutional machinery in the State, Parliament can take over the legislative authority of the State. Art. 249 empower the Rajya Sabha to transfer any matter in the State List to the legislative jurisdiction of Parliament by a resolution passed by a two-thirds majority. According to Art. 252 if the Legislatures of two or more States pass resolution to the effect that it is desirable to have a law passed by the Parliament can make laws regulating the matter. Any other State may also adopt such a law by passing a resolution to that effect. Such laws can be amended or repealed only by the Parliament. Art.253 empowers the Parliament to make laws for the whole or any part of the territory of India for implementing international agreements and conventions to which India is a party even if the subjects covered by such treaties and agreements fall within the State List.

Finally, the residuary powers have been placed under the Legislative jurisdiction of the Union Parliament. This is a departure from the normal pattern of federalism. In the U.S.A., Switzerland and Australia, residuary powers vest in the component units. The Indian Constitution makes preferred to follow the example of Canada in the assignment of residuary powers

Central control over state legislation

In addition to the parliament’s power to legislate directly on the State subjects as mentioned above, the Constitution also provides for the Center’s consent before a Bill passed by a State legislature can become a law. A State law providing for compulsory acquisition of private property shall have no effect unless it has received the consent of the President. Art. 31-A grants immunity to laws providing for agrarian reforms from  Arts. 14 and 19. The immunity of Art. 31-A will not be available to a State law unless it has received the consent of the President. The object of these provisions is to ensure uniformity in laws providing for agrarian reforms.

Art. 200 directs the Governor of a State to reserve a Bill passed by a State Legislature for the consideration of the President if in his opinion, if passed into law, would derogate the powers of the High court.

Art. 282 (2) authorizes a State to tax in respect of water or electricity, generated, consumed, distributed or sold by any authority established by law made by parliament. But no such law shall be valid unless it has been reserved for the consideration of the President and has received his assent.

Art. 304 (b) authorizes a State Legislature to impose reasonable restrictions on the freedom of trade, commerce and intercourse within the State in the public interest. But such laws cannot be introduced in the State Legislature without the previous sanction of the President.

In short, the states do not possess exclusive or inviolable jurisdiction even in matters formally recognized by the constitution as falling within the sphere of State autonomy. In the UnitedState of America, federal legislation on any subject, which falls with in the sphere reserved to the States, is impossible without a constitutional amendment.

Administrative relations

The administrative relations between the Union and the States offer yet another proof of the highly integrated nature of the Indian federation. Under the constitution the Union government can exercise the executive power in respect of all matters within its legislative jurisdiction. Some of these matters, such as customs, and central excise, income tax, Railways, post and Telegraphs are administered directly by services maintained by the Union Government. In most of the cases, the administration of Union matters is delegated to State authorities. In this respect, there is a striking contrast between the American and the Indian federal system. In the United States, the administrative systems of the Union and the States run parallel. In India they meet at many points.

The Union-State administrative relations in India are organized as to enable the Union Government exercise considerable direction and control over the administrative machinery of the States. The constitution on places upon the States the obligation to exercise their executive authority in such a way as to ensure compliance with the Union laws. It also enshrines that the executive power of the State shall be so exercise of the executive power of the Union. The Union Government has been armed with the power of giving such directions to States as may appear to be necessary for the purpose. The Union Government can apply drastic sanctions against the state, which falls to carry out its directions. Acting on the powers under Art. 356 the President may proclaim a breakdown of constitutional government in a state and proceed to take into his hands all the powers of the Governor or any other State officer. In such an eventually, the federal basis of Indian polity is suspended in respect of the particular State concerned. The Union government has also been given certain power to promote inter-state cooperation and to settle inter- State river water disputes. For this purpose the President may appoint Inter-State Council to effect coordination between states. The function of the Inter-State council is advisory in nature.

Financial relations

The Constitution provides for a financially strong centre so much so the States are almost totally dependent on the Union. The outstanding feature of Indian finances is that most of the resources accrue to the Union and out of these some are transferred to   States.

Scheme of distribution of revenue

Art.  268 provides the scheme of the distribution of revenue between the Union and the States. The States possess exclusive jurisdiction over taxes enumerated in the State List. The Union is entitled to the proceeds of the taxes in the Union List. The Concurrent List included no taxes. However, while the proceeds of taxes within the State List are entirely retained by the States, proceeds of some of the taxes in the Union List be allotted, wholly or partially, to the States. The Constitution mentions four categories of Union taxes, which are wholly or partially assigned to the States:

(i)      Duties Levied by the Union but Collected and Appropriated by the States. According to Art. 268 stamp duties and duties of excise on medicinal and toiled preparations mentioned in the Union List are levied by the Central Government. These duties are collected by the states within which such duties are leviable. The proceeds of such duties are assigned to the States.

(ii)     Taxes Levied and Collected by the Union but assigned to the States. According to Art. 269 (1) duties in respect of succession to property other than agricultural land, (2) estate duty in respect of property other than agricultural land, (3) terminal taxes on goods or passengers carried by railway, sea or air, (4) taxes on railway fares and freights etc.

(iii)    Taxes levied and collected by the Union and distributed between the Union and States. According to Art. 270 income tax not including corporation tax is levied and collected by the Union and is distributed between the Union and the States. After deducting some attributed to the Union territories and to the Union emoluments a prescribed percentage of the taxes are distributed among States in such manner as may be prescribed by law.

(iv)    Taxes levied and collected by the Union and may be distributed between the Union and States. During other than those on medicinal and toilet preparations are mentioned in the Union List are levied and collected by the Union and whose net proceeds may be shared between the Union and the States.

The Union Government can borrow money on the security of the Consolidated Funds of India. State Government has to obtain the permission of the Centre to raise loans. The centre has powers to grant loans and grants-in -aid to the States. The President appoints a Finance Commission every five years to advise him regarding the distribution of resources between the Union and the States and other related matters.

Further, the President appoints the comptroller and Auditor- General of India, who determines the manner in which the accounts. During a Financial Emergency, the Centre can require the States to reduce the salaries of their servants and direct them to reserve all the Money bills for its approval.

101st Constitutional Amendment Act: Goods and Services Tax

There are several articles in the constitution of India which define the financial relations between Union and States. Since GST bills involve a huge interest of the state governments, such a historical tax reform cannot take place without making suitable changes into the constitution. For this purpose, 101st amendment of the constitution was passed. This act received the assent of the President of India on 8th September, 2016 and came into force on July 1st 2017. The important changes made in constitution (new articles / amended articles) via this law are as follows:

Article 246 (A)

This is a new article inserted in the constitution. It says that:

(1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.

(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

Notable Points from Article 246A

• Both Union and States in India now have “concurrent powers” to make law with respect to goods & services
• The intra-state trade now comes under the jurisdiction of both centre and state; while inter-state trade and commerce is “exclusively” under central government jurisdiction.

Article 269A

This is a new article which reads as follows:

(1) Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.

Explanation—For the purposes of this clause, supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-State trade or commerce.

(2) The amount apportioned to a State under clause (1) shall not form part of the Consolidated Fund of India.

(3) Where an amount collected as tax levied under clause (1) has been used for payment of the tax levied by a State under article 246A, such amount shall not form part of the Consolidated Fund of India.

(4) Where an amount collected as tax levied by a State under article 246A has been used for payment of the tax levied under clause (1), such amount shall not form part of the Consolidated Fund of the State.

(5) Parliament may, by law, formulate the principles for determining the place of

supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.’

Notable Points from Article 269A

•          This article says that in case of the inter-state trade, the tax will be levied and collected by the Government of India and shared between the Union and States as per recommendation of the GST Council.

•          The article also makes it clear that the proceeds such collected will not be credited to the consolidated fund of India or state but respective share shall be assigned to that state or centre. The reason for the same is that under GST, where centre collects the tax, it assigns state’s share to state, while where state collects tax, it assigns centre’s share to centre. If that proceed is deposited in Consolidated Fund of India or state, then, every time there will be a need to pass an appropriation tax. Thus, under GST, the apportionment of the tax revenue will take place outside the Consolidated Funds.

Article 279-A:

This article provides for constitution of a GST council by president within sixty days from this act coming into force. The GST council will constitute the following members:

1. Union Finance Minister as chairman of the council
2. Union Minister of State in charge of Revenue or Finance
3. One nominated member from each state who is in charge of finance or taxation

The GST council will be empowered to take decisions on the following:

• The taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax;
• The goods and services that may be subjected to, or exempted from, the goods and services tax;
• Model Goods and Services Tax Laws, principles of levy, apportionment of Integrated Goods and Services Tax and the principles that govern the place of supply;
• The threshold limit of turnover below which goods and services may be exempted from goods and services tax;
• The rates including floor rates with bands of goods and services tax;
• Any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster;
• Special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and
• Any other matter relating to the goods and services tax, as the Council may decide.

All decisions taken at the GST council will be taken based on voting. Process of voting is clearly articulated in detail in the constitutional amendment bill.

Changes in the 7th Schedule

This amendment has made following changes in 7th schedule of the constitution:

Union List:

• The entry 84 of Union List earlier comprised the duties on tobacco, alcoholic liquors, opium, Indian hemp, narcotic drugs and narcotics, medical and toilet preparations. After this amendment, it will comprise of Petroleum crude, high speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel, tobacco and tobacco products. Thus, these are now out of ambit of GST and subject to Union jurisdiction.
• Entry 92 (newspapers and on advertisements published therein) has been deleted thus, they are now under GST.
• Entry 92-C (Service Tax) has been now deleted from union list.

State List

• Under State list, entry 52 (entry tax for sale in state) has been deleted.
• In Entry 54, Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92-A of List I.; has been now replaced by Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods.”
• Entry 55 (advertisement taxes) have been deleted.
• Entry 62 (Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling) has been replaced by these taxes only to be levied by local governments (panchayats, municipality, regional council or district council.

Other Important amendments in existing articles

• The residuary power of legislation of Parliament under article 248 is now subject to article 246A.
• Article 249 has been changed so that if 2/3rd majority resolution is passed by Rajya Sabha, the Parliament will have powers to make necessary laws with respect to GST in national interest.
• Article 250 has been amended so that parliament will have powers to make laws related to GST during emergency period.
• Article 268 has been amended so that excise duty on medicinal and toilet preparation will be omitted from the state list and will be subsumed in GST.
• Article 268A has been repealed so now service tax is subsumed in GST.
• Article 269 would empower the parliament to make GST related laws for inter-state trade / commerce.

Further, the amendment also provided that Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years. This resulted into the Compensation Cess Bill.

Important Items of Three Lists (Article 246)

Commissions / Committees constituted with respect to Centre-State Relations

1.      Setalvad Committee – The Setalvad Committee was appointed in 1966 by  the Administrative Reform Commission (1966-69) to study and make recommendations  for the improvement of Centre-state relations. The Committee recommended for giving more autonomy to the States within the limit of the Constitution.

2.      Raja Mannar Committee – This committee was appointed in 1969 by Tamilnadu government for suggesting measures for providing  more autonomy to States. Its two other members were – Dr. Laxman Swamy Muddaliar and P. C. Chanda Reddy. The Committee recommended for – (i) abolishing the residuary powers or transferring  them to the States, (ii) organisation of Inter-State Council and (iii) abolition of All India Services.

3.      Sarkaria Commission headed by Justice Ranjeet Singh Sarkaria, the Commission was appointed on March 24, 1983 by the Union government to study and make recommendations with respect to Centre-State relations. The Commission has submitted its report in 1988.

4 . Second Commission on Centre-State Relations (M.M. Punchhi), 2007.