- The distribution of powers is an essential feature of federalism.
- A federal constitution establishes the dual polity with the Union at the centre and the States at the periphery, each endowed with the sovereign powers to be exercised in the field assigned to them respectively by the constitution.
- The state is not subordinate to the centre in its own field; the authority of one is to coordinate with the other.
- In the Indian federal set-up, the constitution divides powers between centre and states as:
Legislative Relations (Article 245)
The various legislative dimensions shared between centre and states are mentioned below:
Related to Territorial Powers
- Article 245(1): Parliament is competent to make laws for the whole or any part of territory of India. The Legislature of the State may make laws for the whole or any part of the State.
- Article 245 (2): Laws made by Parliament can have extra-territorial effect (outside of Indian Territory). Laws of Parliament also govern the Indian Subjects and their property in any part of the world.
- For certain UTs like Andaman & Nicobar, Lakshadweep and Dadra & Nagar Haveli, regulations made by the President have the same force as the Acts of Parliament and such regulations may repeal or amend a law made by Parliament in relation to such territory.
- The application of Acts of Parliament to any scheduled Area may be barred or modified by notifications made by the Governor.
- The Governor of Assam may direct that any other Act of Parliament shall not apply to an autonomous district or tribal region. Similar powers have been vested with the President regarding tribal regions in the states of Meghalaya, Tripura and Mizoram.
Related to Legislative Powers
- In distributing subject matters between the Centre and States, our constitution makers followed Canadian scheme. However, they added one more list to it, Concurrent List. (GoI Act 1935 had 3 fold enumerations 🙁 Federal, Provincial and Concurrent). 3 Lists are: Union List, State List and Concurrent List.
- Subjects mentioned in the Union List are of national importance and only Parliament is competent to make laws on these subjects. For the State List, only the States have exclusive power to make laws.
- Concurrent List is a “Twilight Zone”, where both the Union and States are competent to make law, without any conflict. In case of a conflict between the Central law and the State law, the Central law prevails over the state law.
- Residuary Powers (Article 248): Parliament has exclusive power to make laws on the subjects not enumerated in any of the 3 Lists (Entry 97 of Union List). Such powers include the power of making any law imposing a tax not mentioned in any of the 3 Lists. Whether a particular subject falls under the residuary power or not is determined by courts.
- To determine whether a particular enactment falls under one Entry or the other, it is the Pith and Substance of such enactment and not its legislative level that is taken account of. Pith and Substance here means the true object of the legislation or statute, and the competence of Legislature, which enacts it.
- Colourable Legislation: The motives of the Legislature are, otherwise, irrelevant for determining whether it has transgressed the constitutional limits of the Legislative power. This principle is based on the maxim that you cannot do indirectly what you cannot do directly.
Related to Parliament’s Powers to Make Laws in State
- Under Article 249, in the national interest, Parliament has the power to make laws w.r.t. any matter included in the State list, for a temporary period, if Rajya Sabha passes a resolution supported by 2/3rd of the members present and voting in that respect. The resolution remains in force for one year; it can be renewed any number of times but not exceeding one year at a time. This provision does not restrict the power of a state legislature to make laws on the same matter. But, in case of inconsistency between a state law and a parliamentary law, the latter is to prevail.
- Under the Proclamation of Emergency, Article 250 empowers Parliament to make laws for the whole or any part of the territory of India w.r.t. all matters in the State list. Such a law however shall cease to effect on the expiration of 6 months after the proclamation of emergency has ceased to operate. Here also, the power of a state legislature to make laws on the same matter is not restricted. But, in case of repugnancy between a state law and a parliamentary law, the latter is to prevail.
- Under Article 252, if the Legislatures of two or more States pass a resolution to the effect that it is desirable to have a Law passed by Parliament on any matters in State List common to these States, Parliament can make Laws in that respect. Such a law can be amended or repealed only by the Parliament and not by the legislatures of the concerned states. The effect of passing a resolution under the above provision is that the Parliament becomes entitled to legislate with respect a matter for which it has no power to make a law. On the other hand, the state legislature ceases to have the power to make a law with respect to that matter. The resolution operates as abdication or surrender of the power of the state legislature with respect to that matter and it is placed entirely in the hands of Parliament which alone can then legislate with respect to it.
- Under Article 253, Parliament has power to make any law for the whole or any part of the territory of India for implementing treaties and international agreements and conventions.
- Under Article 256, Parliament is empowered to make laws w.r.t. all matters in the State list when there is failure of constitutional machinery of the State under Article 356. A law made so by the Parliament continues to be operative even after the President’s rule. This means that the period for which such a law remains in force is not co-terminus with the duration of the President’s rule.
Sarkaria Commission’s Opinion on Legislative Relations
- The central theme of the criticism levelled before the Commission against the working of Union-State legislative relations is ‘over-centralization’. Commission opined that:
- Regarding Article 246 and 254: If the principles of Union Supremacy are excluded from these articles, it is not difficult to imagine its deleterious results. There will be every possibility of our two-tier political system being stultified by interference, strife, legal chaos and confusion caused by a host of conflicting laws.
- Regarding residuary powers: Powers related to taxation should remain with Parliament, while the other residuary powers should be placed in Concurrent List.
- Regarding Union List: Commission feels that the proposed redistribution of powers would require drastic changes in the basic scheme and framework of the Constitution so dedicatedly designed to protect the independence and ensure the unity and integrity of the country.
- Regarding Concurrent List: Commission observes that the demand for abolition of the Concurrent List would be a retrograde step. Such abolition would involve a drastic change in the fundamental scheme and framework of the Constitution.
- During the time of Emergency, Indian constitution works like a unitary Government. In normal times, there are constitutional provisions, which ensure the control of the Union over the states. Some of the mechanisms are:
- Distribution of Executive Powers-The executive power has been divided between the Centre and the states on the lines of the distribution of legislative powers, except in a few cases. Thus, the executive power of the Centre extends to the whole of India. Similarly, the executive power of state extends to its territory in respect of matters on which the state legislature has exclusive power of legislation (i.e., the subjects enumerated in the State List).
In respect of matters on which both the Parliament and the state legislatures have power of legislation (i.e., the subjects enumerated in the Concurrent List), the executive power rests with the states except when a Constitutional provision or a parliamentary law specifically confers it on the Centre.
- Further Article 257 provides that States must exercise their executive power in such a way so as not to impede or prejudice the exercise of the executive power of the Union in the State.
- Article 256 provides that the executive power of the State shall be so exercised as to ensure compliance with the laws made by the Parliament and executive power of the Union shall also extend to the giving of such directions to a state as it may deem essential for the purpose.
- Center’s Directions to the States – The Centre is empowered to give directions to the states with regard to the exercise of their executive power in the following matters:
- The construction and maintenance of means of communication (declared to be of national or military importance) by the state;
- The measures to be taken for the protection of the railways within the state;
- The provision of adequate facilities for instruction in the mother-tongue at the primary stage of education to children belonging to linguistic minority groups in the state; and
- The drawing up and execution of the specified schemes for the welfare of the Scheduled Tribes in the state.
- The Constitution prescribes coercive sanction for the enforcement of its directions through Article 356.
- Delegation of Union Functions to the States
- Under Article 258(1), The President with the consent of the Governor of a state entrusts either conditionally or unconditionally to that Government or to his officers, functions in relation to any matter to which the executive power of the Union extends.
- Under Article 258(2), Parliament is empowered to use State machinery for the enforcement of Union Laws. For such purpose, it can confer powers or impose duties on State functionaries.
- The Constitution also makes provision for the entrustment of the executive functions of the centre to a state without the consent of the state. But, in this case the delegation is by the parliament and not by the President.
- All India Services are common to both the Union and the States. The officers of these services are appointed and regulated by the Centre and are placed in various States.
- Grants in-aid (Article 275): Parliament has power to make such grants as it may deem necessary to give financial assistance to any State, which is in need of such assistance (Article 275).
- Article 261 provides that full faith and credit shall be given throughout the territory of India to public acts, records and judicial proceedings of the Union and every State.
- Article 261(3) declares that final judgment or orders delivered or passed by civil courts in any part of territory of India can be executed anywhere in the country.
- Article 262: Adjudication of disputes relating to waters of inter-state rivers or river valleys. Article 262(2) provides that Parliament may by Law provide that neither the SC nor any other court shall exercise jurisdiction in respect of any such dispute.
- Under Article 263, the President has power to establish Inter-State Councils and define its duties, organization and procedure. These councils have a duty of inquiring into and advising upon disputes, which arises between the States. These Councils also investigate and discuss the subjects of common interest between the Union and States or between two or more states and make recommendations on any such subject for better coordination of policy and action. The President has so far established the Central Council of Health, a central Council of Local Self-Government and a Transport Development Council.
- Parliament has power to constitute an Inter-State Commerce Commission (Article 307) and empower it to execute such functions as it may deem fit.
Sarkaria Commission’s Opinion on Administrative Relations
- In a two-tier system of government, where the administration of Union Law is largely secured through the machinery of the State, differences are bound to arise in regard to the manner of implementation of Union laws. Article 256 and 257 are essential to ensure harmonious exercise of executive power by the Union and the States.
- Before issuing directions to a State under Articles 256 and 257, the Union should explore the possibilities of settling points of conflict by all other available means. a direction under these provisions and application of the sanction under Article 365 in the event of its non-compliance is a measure of last resort.
- Federalism is more a functional arrangement for co-operative action, than a static institutional concept. Article 258 provides a tool, by the liberal use of which, co-operative federalism can be substantially realized in the working of the system. The commission recommends a more extensive and generous use of this Article.
- Articles 268 to 293 in Part XII of the Constitution deal with Centre–state financial relations.
- Finance Commission (Article 280) recommends to the President on the distribution of net proceeds of taxes between the centre and states.
- Constitution divides the taxing powers between the Central and states in following way:
- Parliament has an exclusive power to levy taxes enumerated in the Union List.
- State Legislature has exclusive power to levy the taxes enumerated in the state list. Both the Parliament and the state legislature can levy the taxes enumerated in the Concurrent List.
- The residuary power of taxation (that is, the power to impose the taxes not enumerated in any of the three lists) is vested in the Parliament. Under this provision, the parliament has imposed gift tax, wealth tax and expenditure tax.
- Parliament can provide for grants-in-aid to states by the Centre. Such sums are charged on the Consolidated Fund of India (Article 275).
- The Union can make public purpose grants to states and to any institution within the states (Article 282).
- Grants-in-Aid to the States – Besides sharing of taxes between the Centre and the states, the Constitution provides for grants-in-aid to the states from the Central resources. There are two types of grants-in-aid, viz, statutory grants and discretionary grants:
- Statutory Grants – Article 275 empowers the Parliament to make grants to the states which are in need of financial assistance and not to every state. These sums are charged on the Consolidated Fund of India every year.
- Apart from this general provision, the Constitution also provides for specific grants for promoting the welfare of the scheduled tribes in a state or for raising the level of administration of the scheduled areas in a state including the State of Assam.
- The statutory grants under Article 275 (both general and specific) are given to the states on the recommendation of the Finance Commission.
- Discretionary Grants – Article 282 empowers both the Centre and the states to make any grants for any public purpose, even if it is not within their respective legislative competence. Under this provision, the Centre makes grants to the states.
- Other Grants – The Constitution also provided for a third type of grants-in-aid, but for a temporary period.
- Thus, a provision was made for grants in lieu of export duties on jute and jute products to the States of
- Assam, Bihar, Orissa and West Bengal. These grants were to be given for a period of ten years from the commencement of the Constitution. These sums were charged on the Consolidated Fund of India.
- Borrowing by the Centre and the States
- The centre can grant loans to states and also give guarantee in respect of loans raised by them (Article 293).
- The Central government can borrow either within India or outside upon the security of the Consolidated Fund of India or can give guarantees, but both within the limits fixed give the Parliament.
- Similarly, a state government can borrow within India (and not abroad) upon the security of the Consolidated Fund of the State or can give guarantees, but both within the limits fixed by the legislature of that state.
- The Central government can make loans to any state or give guarantees in respect of loans raised by any state. Any sums required for the purpose of making such loans are to be charged on the Consolidated Fund of India.
- A state cannot raise any loan without the consent of the Centre, if there is still outstanding any part of a loan made to the state by the Centre or in respect of which a guarantee has been given by the Centre.
- Parliament can impose restrictions on Inter-state trade and commerce in the public interest (Article 302).
- The accounts of the states shall be kept in such form as prescribed by the president on the advice of the Comptroller and Auditor-General of India (Article 150).
Intergovernmental Tax Immunities
Exemption of Central Property from State Taxation
- The property of the Centre is exempted from all taxes imposed by a state or any authority within a state like municipalities, district boards, panchayats and so on. But, the Parliament is empowered to remove this ban. The word ‘property’ includes lands, buildings, chattels, shares, debts, everything that has a money value, and every kind of property—movable or immovable and tangible or intangible. Further, the property may be used for sovereign (like armed forces) or commercial purposes.
- The corporations or the companies created by the Central government are not immune from state taxation or local taxation. The reason is that a corporation or a company is a separate legal entity.
Exemption of State Property or Income from Central Taxation
- The property and income of a state is exempted from Central taxation. Such income may be derived from sovereign functions or commercial functions. But the Centre can tax the commercial operations of a state if Parliament so provides. However, the Parliament can declare any particular trade or business as incidental to the ordinary functions of the government and it would then not be taxable.
- Notably, the property and income of local authorities situated within a state are not exempted from the Central taxation. Similarly, the property or income of corporations and companies owned by a state can be taxed by the Centre.
- The Supreme Court, in an advisory opinion (1963), held that the immunity granted to a state in respect of Central taxation does not extend to the duties of customs or duties of excise. In other words, the Centre can impose customs duty on goods imported or exported by a state, or an excise duty on goods produced or manufactured by a state.
Goods and Services tax
- GST (101st amendment of the constitution) aims to make India a common market with common tax rates and procedures and remove the economic barriers thus paving the way for an integrated economy at the national level. By subsuming most of the Central and State taxes into a single tax and by allowing a set-off of prior-stage taxes for the transactions across the entire value chain, it would mitigate the ill effects of cascading, improve competitiveness and improve liquidity of the businesses. GST is a destination based tax. It follows a multi-stage collection mechanism. In this, tax is collected at every stage and the credit of tax paid at the previous stage is available as a set off at the next stage of transaction. This shifts the tax incidence near to the consumer and benefits the industry through better cash flows and better working capital management.
- The important changes made to the Constitution are:
- 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, has 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.
- Article 269A: 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.
- —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.
- 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.
- Article 279-A: This article provides for the constitution of a GST council by president within sixty days from this act coming into force. The GST council will constitute the following members:
- Union Finance Minister as chairman of the council
- Union Minister of State in charge of Revenue or Finance
- One nominated member from each state who is in charge of finance or taxation.
- The GST would replace the following taxes currently levied and collected by the Centre:
- Central Excise Duty
- Duties of Excise (Medicinal and Toilet Preparations)
- Additional Duties of Excise (Goods of Special Importance)
- Additional Duties of Excise (Textiles and Textile Products)
- Additional Duties of Customs (commonly known as CVD)
- Special Additional Duty of Customs (SAD)
- Service Tax
- Central Surcharges and Cesses so far as they relate to supply of goods and services
- State taxes that would be subsumed under the GST are:
- State VAT
- Central Sales Tax
- Luxury Tax
- Entry Tax (all forms)
- Entertainment and Amusement Tax (except when levied by the local bodies)
- Taxes on advertisements
- Purchase Tax
- Taxes on lotteries, betting and gambling
- State Surcharges and Cesses so far as they relate to supply of goods and services
- The list of exempted goods and services would be common for the Centre and the States.
- An Integrated tax (IGST) would be levied and collected by the Centre on inter-State supply of goods and services. Accounts would be settled periodically between the Centre and the States to ensure that the SGST/UTGST portion of IGST is transferred to the destination State where the goods or services are eventually consumed.
- Zonal Councils aim at promoting cooperation & coordination between States, UTs and the Centre.
- They discussed and made recommendations regarding common matters.
- They are only deliberative and advisory bodies.
- These are statutory bodies created by the States Reorganization Act of 1956.
- The Act divided the country into 5 zones:
- Northern Zone
- Central Zone
- Eastern Zone
- Western Zone
- Southern Zone
- Each zonal council consist of:
- From Centre – Home Minister (acts as a chairman)
- From States – CM of all States in Zone + 2 other ministers (Each CM acts as a Vice-Chairman by rotation, holding office for a period of 1 year at a time)
- Administrators of all UTs in the zone
- Following can be associated as advisors (without right to vote)
- One person nominated by the Planning Commission.
- Chief Secretary of each state in the zone.
- Development Commissioner of each state in the Zone.
- North-Eastern Council
- In addition to the above Zonal Councils, a North-Eastern Council was created by a separate Act of Parliament—the North-Eastern Council Act of 1971.
- Its members include Assam, Manipur, Mizoram, Arunachal Pradesh, Nagaland, Meghalaya, Tripura and Sikkim. Its functions are similar to those of the zonal councils, but with few additions.
- It has to formulate a unified and coordinated regional plan covering matters of common importance.
- It has to review from time to time the measures taken by the member states for the maintenance of security and public order in the region.