Tax Distribution In India
There have been many conflicts with regard that whether India is a federal
state of not. But, when we see about the characteristics of federal state then
we find that one of the characteristics specifically mentions about the
distribution of taxes. Thus, a federal state always has a distribution of
powers. Indian Constitution specifies about the distribution of revenues where
exclusive powers are given to the State, to collect taxes and exclusive powers
rest with Union in relation with taxes.
There are three lists namely, central, state and concurrent lists, where
distribution of taxes is there in various entries. So, framers of the
Constitution have definitely made the distribution appropriately.
The importance of such a distribution is very clear, as with the distribution
only, Government will come to conclusion as how has been distributed to each
states and how much it should be kept in consolidated fund of India to meet
future needs. So, it's very important to see that equal distribution is made of
revenues with respect to their contribution.
Distribution of revenues thus, leads to clarity and leaves no scope for any
confusion. With the help of distribution, we meet justice. Also, the
relationship between center and state grows and the Government doesn't go only
unitary but equal participation of State is also there in colleting taxes. So,
distribution of revenue leads to a better form of Government as the provisions
with regard to distribution can be changed according to needs and circumstances
if any conflicts between the distributions arise.
The distribution of revenues is from Article 278 till Article 281 in the Indian
Constitution. The project gives importance to various restrictions imposed on
State Government in levying taxes, distribution of revenues, finance commission
Distribution of Revenues Between Union And StatesThere are few Articles in the Indian Constitution which specifically focuses on
distribution of revenues.
Article 268: Duties levied by the Union but collected and appropriated by the
This Article was amended by the Constitution (seventh amendment) Act, 1956 with
effect from 1st November 1956. Article 268 (1) provides that stamp duties and
excise on medicinal and toilet preparation which are mentioned in Union List,
the collection of duties shall be made by the State which shall be levied by the
Union Government. The proceeds of any such duty leviable within any State in any
financial year shall not form part of the consolidated Fund of India but shall
be assigned to that State.
Article 268-A: Service tax levied by Union and collected an appropriated by
the Union and States:
This Article was inserted by ninety-fifth Amendment Bill, 2003 which was passed
by both the Houses of Parliament - Lok Sabha on 6-5-2003 and Rajya Sabha on
8-5-2003 . Article speaks that taxes on services shall be levied by the
Government of India which shall be collected by the States. Such tax shall be
appropriated by the Government of India and the States.
Article 269: Taxes levied and collected by the Union but assigned to the
This Article was lastly amended by the eightieth amendment with effect from 1st
April, 1996. Taxes which shall be levied and collected by the Government of
India which are included in this Article: (a) the consignment of goods which
takes place in the course of inter-state trade or commerce, (b) sale or purchase
of goods which takes place in the course of inter-state trade or commerce.
Article 270: Taxes levied and distributed between Union and States:
This Article was lastly amended in eightieth amendment which was in effect from
1st April, 1996. This Article specifically provides that taxes on income other
than agricultural income and corporation tax shall be levied and collected by
the Union and is distributed by the Union and States. The revenue which shall be
transferred to the Sates is unconditional and the States shall be free to use
their income as and when they like.
In spite of the large transfer, the fact remains that States are not happy and
the main reason being that due to political reasons, the States do not make
adequate efforts to impose more tax. The tax proceeds shall not form a part of
consolidated fund of India but shall be distributed among States.
Case: T.M. Kanniyan v. I.T.O
Supreme Court gave a judgment with regard to income tax and said that the income
tax attributable to Union territories forms a part of the Consolidated Fund of
India. It is not necessary to make any distribution of income tax with respect
to Union territories as those territories are centrally administered through the
Article 271: Surcharge on certain duties and taxes for purposes of the Union:
This Article corresponds to S. 137 and S. 138(1) of the Government of India Act,
1935. Article basically speaks that Parliament is empowered to levy a surcharge
from time to time as it's the parliament who has imposed a surcharge and so it
won't be precluded to surcharge in another form. All proceeds from such
surcharges are to form part of the Consolidated Fund of India and are not liable
to be distributed among the states. No one can prevent Parliament to impose a
Article: 272: Taxes which are levied and collected by the Union and may be
deistributed between the Union and the States:
This Article has been omitted by the Constitution Act, in eightieth amendment.
Grant - In - Aid:
Article 273: Grants in lieu of export duty on jute and jute products:
Under the Government of India Act, the Central Governement shared the net
proceeds of the jute export duty with the jute growing provinces. Under this
Constitution, the States are not entitled to any such share.
The Provision specifies that for a period of 10 years from the commencement of
the Constitution, the jute growing states of West Bengal, Bihar, Orissa and
Assam will receive grants-in-aid from the Union in lieu of the above share of
the jute export duty to the extent of sums specified by the President with the
consultation of Finance Commission.
Article 275: Grants from the Union to certain States
This Article was amended in twenty-second Amendment which came in effect in
1969. Parliament is empowered to make such grants, as and when it is necessary
to the States which are in need of financial assistance. Special grants may also
be made to promote welfare schemes for Scheduled Castes and Scheduled Tribes.
Article 282: Expenditure defrayable by the Union or a State out of its
This Article corresponds to (i) Section 150 of the Government of India Act,
1935; (ii) Article 1, Section 8(1) of the Constitution of the United States, and
(iii) Section 81 of the Commonwealth of Australia Constitution Act, 1900. This
Article provides that the spending power of the Union or State Legislature is
not limited to the legislative powers. Thus, they can spend more money but the
purpose should be public.
Criticism: This Article has very wide wings. How this money is to be utilized,
is not mentioned in this article. So, any political party can misuse the money
in name of public purpose.
Case: Cf. Narayanan Nambudripad, kidangazhi Manakkal v State of Madras
Supreme Court has decided that the exercise of religion is a private purpose.
But, if the States themselves take the management of such religious endowment in
the interest of public order, mortality, or health, then it is for pubic
Restrictions of The States Power To Levy Taxes
Article 286: State's power to Levy Taxes
Article 286 gives the power to levy taxes on sale or purchase of goods other
than newspapers belonging to States. But, there are few Union laws like imports
and exports and taxes on sale or purchase of goods, other than newspapers in the
course of inter-State trade or commerce. So, to avoid such overlapping,
Article 286 subjects the States power to levy sales tax to the following
Article 286 (1) (a): No State can tax a sale or purchase taking place outside
This Article specifically prohibits a State to impose a tax on the sale or
purchase of goods where such sale or purchase takes place outside the State.
But, clause 2 of this Article clearly lays down the principles for determining
when a ale or purchase takes place outside the State.
Article 286 (1) (b): No State can tax a sale or purchase taking place in the
course of import and export:
This Article prohibits a State to impose a tax on the sale or purchase of goods
when such sale or purchase takes place in the course of import of the goods into
or export of the goods out of the territory of India. Parliament may by law
formulate principles for determining when a sale or purchase takes place in the
course of import and export of goods.
Article 286(3): Taxes on sale or purchase of goods of special importance:
Section 14 of the Central Sales Tax Act, 1956 declares a number of goods to be
of special importance in Inter-State trade or commerce. Section 15 thus, imposes
restrictions on taxation of sales of such goods.
Article 286 (3) (b): Taxes on the sale or purchase of goods in the course
of Inter-State trade or commerce specified in sub clauses (b), (c) or (d) of
clauses (29-A) of Article 366:
Clause 29-A of Article 366 provides for tax on sale or purchase of goods on
transfer of property in goods involved in execution of a works contract, on
delivery of goods on hire-purchase or any system of payment by installments,
transfer of right to use any goods for any purpose for cash, deferred payment or
any other valuable consideration. Thus, State law is restricted to impose any
tax on above things.
Article 277 And Article 279
Article 277: Savings
This article speaks about any taxes, duties, cesses or fees which immediately
before the commencement of the Constitution, were being lawfully levied by the
Government shall be continued for the same purposes notwithstanding that above
things are mentioned in Union list, unless the contrary law has been provided.
According to Durga Das Basu, the object of this article is to prevent
dislocation of the finances of local government and authorities by reason of the
coming into force of new constitutional enactments disturbing heads of taxation
on lines different from those which existed before the commencement of such
It is presumed that the taxation is meant for the benefit of the public which
results from expenditure incurred or from schemes undertaken by State or local
Government authorities. The scope of the Article is limited and it has no
application where there has been no shifting in the allocation of power as
between the Union and the State under the Constitution.
It must be noted that article 372 is a general provision and article 277 is a
special provision. Article 372 saves all pre-constitutional valid laws and
article 277 is confined to only taxes, duties cesses or fees. Article 372 must
be read subject to Article 277.
Article 279: Calculation of net proceeds, etc
This article defines the net proceeds of a tax. It means all the proceeds of tax
reduced by the cost of collection. The certificate of the Comptroller and the
Auditor General of India of net proceeds of a tax in a State shall be final.
Finance CommissionArticle 280 of the Indian Constitution speaks about finance commission. The idea
of Finance Commission has been adopted from the model of the Common-wealth
Commission of Australia. The expert committee on the Financial Provisions of the
Constitution recommended the setting up of a Finance Commission. The Finance
Commission in India is an innovation of far reaching importance as it attempts
to make the Indian fiscal system federal in character.
It is worth noting that in assessing the needs of the States and determining the
proportions in which the States, individually, should share the central
assistance, the Finance Commission has been guided inter-alia, by the principle
that the scheme of distribution should attempt to lessen the inequalities
between the states The framers of the Constitution ensured that the transfer of
funds from the Centre to the States should be made neither in such a manner as
nor to impair the autonomy of the States.
Article 280 required the President to appoint a Finance Commission within two
years from the commencement of the Constitution and thereafter at the expiration
of every fifth year or at such earlier time as the President might consider
According to the Finance Commission Act, it has all the powers of a civil court
for summoning the witnesses, requiring production of any document, requiring any
person to furnish information on any point which the Commission regards as
useful or relevant to any matter under its consideration.
This paper work basically deals with the distribution of taxes. So, my paper
work focuses on the various ways in which distribution of revenues takes place,
also the role of finance commission, and certain restrictions of State in levy
of taxes. The idea of Finance Commission is very unique. It is very important to
have a separate body recommending in issues related financing.
The framers of the Constitution have correctly put note of the finance
commission. The distribution of revenues have been properly dealt as neither the
rules are rigid nor it's confusing. The idea of dividing the taxes has been
properly dealt. Though, the collection of main revenues is dealt by Union
Government, but still, there are quite number of taxes which are dealt only by
The distribution in few revenues is though overlapping but the ends of justice
do meet. I can clearly note that Parliament's rights are not tied up. Every law
is subject to Parliaments new contrary law. Thus, Indian Constitution gives wide
powers to parliament and it is not rigid neither same. So, according to future
needs one can also change the said rules of law. The procedural aspects of this
distribution might be confusing or rather difficult but the theoretical aspects
are very clearly laid down by the Indian Constitution.
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