Centre-State Relations in India: An Affirmative Study

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Center-state relations form the cornerstone of India’s federal structure, reflecting the delicate balance between unity and diversity. As a quasi-federal system, the Indian Constitution meticulously delineates the distribution of powers, responsibilities, and resources between the Centre and the States, ensuring cooperative governance while addressing regional aspirations. Over the decades, this relationship has evolved, shaped by political dynamics, economic demands, and judicial interpretations.

This study delves into the constitutional framework of Centre-State relations, examining the legislative, administrative, and financial dimensions that define the partnership. It also highlights the challenges and conflicts that arise in practice, such as issues of autonomy, resource allocation, and the impact of central interventions like the President’s Rule. By analyzing these aspects, the article seeks to present an affirmative perspective on the interplay between the Centre and States, emphasizing its critical role in sustaining India’s democratic ethos and fostering national development.

Table of Contents

Legislative Relations

Articles 245 to 255 of Part XI of the Indian Constitution outline the legislative relations between the Centre and the states. Additionally, several other articles address this topic.

Like other federal constitutions, the Indian Constitution divides legislative powers between the Centre and the states, considering both territorial jurisdiction and the subjects of legislation. Furthermore, it provides mechanisms for parliamentary legislation in the state domain under exceptional circumstances and outlines the Centre’s authority over state legislation in specific cases.

The legislative relations between the Centre and the states can be categorized into four key aspects:

  1. Territorial Extent of Central and State Legislation
  2. Distribution of Legislative Subjects
  3. Parliamentary Legislation in the State Domain
  4. Centre’s Control Over State Legislation

Territorial Extent of Central and State Legislation

The Indian Constitution defines the territorial scope of legislative powers for both the Centre and the states as follows:

  1. Parliament’s Legislative Authority:
    • Parliament can make laws for the entire territory of India or any part of it.
    • The territory of India includes states, union territories, and any other areas that are currently part of the Indian territory.
  2. State Legislature’s Legislative Authority:
    • A state legislature can legislate for the entire state or any part of it.
    • However, state laws cannot be enforced outside the state unless there is a sufficient connection between the state and the subject matter of the law.
  3. Extraterritorial Legislation by Parliament:
    • Only Parliament can enact laws that have extraterritorial application. Such laws apply to Indian citizens and their property anywhere in the world.

Restrictions on Parliamentary Territorial Jurisdiction

Despite its broad territorial powers, Parliament’s jurisdiction is subject to specific constitutional restrictions:

  1. Union Territories:
    • The President has the authority to make regulations for the peace, progress, and good governance of certain union territories, including the Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli, Daman and Diu, and Ladakh.
    • These regulations hold the same legal force as an act of Parliament and can amend or repeal Parliamentary laws in these territories.
  2. Scheduled Areas:
    • The Governor of a state can direct that a Parliamentary act does not apply to a scheduled area within the state or applies with specified modifications and exceptions.
  3. Tribal Areas:
    • The Governor of Assam has the authority to direct that a Parliamentary act does not apply to a tribal area (autonomous district) in the state or applies with specified modifications and exceptions.
    • Similarly, the President has the same powers for tribal areas (autonomous districts) in Meghalaya, Tripura, and Mizoram.

Distribution of Legislative Subjects

The Constitution establishes a three-tier division of legislative subjects between the Centre and the states, outlined in the Seventh Schedule:

  1. Union List (List I):
    • The Parliament has exclusive authority to legislate on matters in the Union List, which currently contains 98 subjects (originally 97).
    • These include areas of national importance like defence, banking, foreign affairs, currency, atomic energy, insurance, communications, inter-state trade, census, and audit.
  2. State List (List II):
    • State legislatures have exclusive powers to legislate on matters in the State List under normal circumstances.
    • Currently, this list comprises 59 subjects (originally 66), such as public order, police, public health and sanitation, agriculture, prisons, local government, fisheries, markets, theaters, and gambling.
  3. Concurrent List (List III):
    • Both Parliament and state legislatures can legislate on matters in the Concurrent List, which now contains 52 subjects (originally 47).
    • Key subjects include criminal law and procedure, civil procedure, marriage and divorce, population control, family planning, electricity, labour welfare, economic and social planning, drugs, and newspapers.
    • The 42nd Amendment Act of 1976 transferred five subjects from the State List to the Concurrent List:
      a) Education
      b) Forests
      c) Weights and measures
      d) Protection of wild animals and birds
      e) Administration of justice, including the constitution and organization of all courts except the Supreme Court and High Courts.
  4. Parliament’s Power Over Union Territories and Acquired Territories:
    • Parliament can legislate on any matter for Union Territories or acquired territories, even if the subject is in the State List.
  5. Goods and Services Tax (GST):
    • The 101st Amendment Act of 2016 introduced special provisions for GST.
    • Both Parliament and state legislatures can legislate on GST levied by the Union or states. However, Parliament has exclusive powers to legislate on GST in the context of inter-state trade or commerce.
  6. Residuary Subjects:
    • Matters not listed in any of the three lists fall under Parliament’s jurisdiction.
    • This includes the power to legislate on residuary taxes.

Principles Behind the Distribution of Subjects

  • Union List: Contains matters of national importance requiring uniform laws across the country.
  • State List: Includes subjects of regional and local importance, allowing for diversity in legislation.
  • Concurrent List: Covers subjects where uniformity is desirable but not essential, enabling flexibility and collaboration.

Historical Comparisons

  • In the United States, only federal powers are enumerated in the Constitution, with residuary powers left to the states.
  • Australia follows the U.S. model of single enumeration of powers.
  • Canada adopts double enumeration, with powers divided between the federal and provincial levels, and residuary powers vested in the Centre.
  • The Government of India Act, 1935, introduced a three-fold distribution of powers (federal, provincial, and concurrent). However, residuary powers were assigned to the Governor-General, not the legislatures. India’s Constitution mirrors this scheme but follows the Canadian precedent of assigning residuary powers to the Centre.

Predominance of Lists

The Constitution establishes the following order of precedence:

  1. Union List prevails over the State List and the Concurrent List.
  2. Concurrent List prevails over the State List.

In case of a conflict between Central and state laws on a Concurrent List subject:

  • The Central law prevails.
  • Exception: If the state law is reserved for presidential consideration and receives the President’s assent, it prevails within that state. However, Parliament retains the power to override such a state law by enacting new legislation on the same subject.

Parliamentary Legislation in the State Field

Under normal circumstances, the legislative powers between the Centre and states are distributed according to the Constitution. However, in extraordinary situations, this distribution can be modified or suspended, allowing Parliament to legislate on matters listed in the State List under the following five circumstances:

1. When Rajya Sabha Passes a Resolution

  • If the Rajya Sabha declares, with a two-thirds majority of members present and voting, that it is necessary in the national interest for Parliament to legislate on a matter in the State List (including Goods and Services Tax), Parliament gains the authority to do so.
  • Such a resolution remains effective for one year and can be renewed indefinitely, but only for one year at a time.
  • Laws made under this provision cease to operate six months after the resolution expires.
  • This does not prevent state legislatures from legislating on the same matter. However, in case of a conflict, Parliamentary law prevails.

2. During a National Emergency

  • While a proclamation of national emergency is in effect, Parliament is empowered to legislate on matters in the State List, including Goods and Services Tax.
  • These laws also become inoperative six months after the emergency ends.
  • Similarly, state legislatures can legislate on the same matter during an emergency, but Parliamentary law takes precedence in case of inconsistency.

3. When States Make a Request

  • If the legislatures of two or more states pass resolutions requesting Parliament to legislate on a matter in the State List, Parliament can do so.
  • The resulting law applies only to the requesting states, but other states can adopt it later by passing similar resolutions.
  • Laws enacted under this provision can only be amended or repealed by Parliament, not by state legislatures.
  • This provision effectively transfers legislative authority on the matter from the states to Parliament.
  • Examples of laws enacted under this provision include:
    • Prize Competition Act, 1955
    • Wildlife (Protection) Act, 1972
    • Water (Prevention and Control of Pollution) Act, 1974
    • Urban Land (Ceiling and Regulation) Act, 1976
    • Transplantation of Human Organs Act, 1994

4. To Implement International Agreements

  • Parliament can legislate on any State List matter to implement international treaties, agreements, or conventions.
  • This ensures the Central government can fulfil its international obligations.
  • Examples of laws passed under this provision include:
    • United Nations (Privileges and Immunities) Act, 1947
    • Geneva Convention Act, 1960
    • Anti-Hijacking Act, 1982
    • Environmental legislation and laws related to TRIPS.

5. During President’s Rule

  • When a state is under President’s Rule, Parliament gains the power to legislate on matters in the State List concerning that state.
  • Laws enacted under this provision remain in force even after President’s Rule ends, until repealed, altered, or re-enacted by the state legislature.

These provisions demonstrate how the Constitution ensures legislative flexibility in exceptional situations, balancing national interests and federal principles.

Centre’s Control Over State Legislation

In addition to Parliament’s power to directly legislate on state matters under exceptional circumstances, the Constitution grants the Centre various mechanisms to control state legislation in the following ways:

  1. Governor’s Reserve Power
    • The Governor can reserve certain types of bills passed by the state legislature for the President’s consideration. The President holds an absolute veto power over these bills.
  2. President’s Prior Sanction for Bills
    • Bills on specific matters listed in the State List can only be introduced in the state legislature with the prior sanction of the President. For example, bills imposing restrictions on the freedom of trade and commerce require such approval.
  3. Financial Emergency Control
    • In the event of a financial emergency, the Centre can direct states to reserve money bills and other financial legislation passed by the state legislature for the President’s consideration.

These provisions illustrate the Constitution’s emphasis on the Centre’s legislative superiority. The Sarkaria Commission on Centre-State Relations (1983–88) emphasized the necessity of federal supremacy for maintaining order and harmony between Union and state laws. The Commission noted:

“The rule of federal supremacy is a technique to avoid absurdity, resolve conflict, and ensure harmony between Union and state laws. Without this principle, it’s easy to imagine a breakdown in the political system, resulting in interference, strife, and legal confusion due to conflicting laws, which would bewilder the common citizen. A unified legislative policy and uniformity on critical Union-state issues would be compromised. The federal principle of unity in diversity would suffer. Therefore, federal supremacy is indispensable for the effective functioning of the federal system.”

This approach is integral to preserving the balance and functionality of India’s federal structure.

Article No.Subject Matter
245Extent of laws made by Parliament and state legislatures
246Subject matter of laws made by Parliament and state legislatures
246ASpecial provisions related to Goods and Services Tax
247Power of Parliament to provide for the establishment of certain additional courts
248Residuary powers of legislation
249Power of Parliament to legislate on state matters in the national interest
250Power of Parliament to legislate on state matters during the Proclamation of Emergency
251Inconsistency between laws made by Parliament under Articles 249 and 250 and state laws
252Power of Parliament to legislate for two or more states by consent, and adoption of such legislation by other states
253Legislation for giving effect to international agreements
254Inconsistency between laws made by Parliament and state laws
255Requirements for recommendations and previous sanctions as matters of procedure only

Administrative Relations

Articles 256 to 263 in Part XI of the Constitution focus on the administrative relations between the Centre and the states. Additionally, several other articles also address related matters.

Distribution of Executive Powers

The executive powers are divided between the Centre and the states, mirroring the distribution of legislative powers, with a few exceptions. The executive power of the Centre extends across the entire territory of India in the following instances:

  1. For matters where Parliament has exclusive legislative authority (i.e., subjects listed in the Union List).
  2. For matters involving rights, authority, and jurisdiction conferred by treaties or agreements.

Similarly, the executive power of a state is confined to its own territory in relation to matters where the state legislature holds exclusive legislative power (i.e., subjects in the State List).

In cases where both Parliament and state legislatures have the authority to legislate (i.e., subjects in the Concurrent List), the executive power generally rests with the states, unless a specific Constitutional provision or a parliamentary law designates it to the Centre. Therefore, a law on a concurrent subject enacted by Parliament is typically executed by the states unless the Constitution or Parliament directs otherwise.

Obligation of States and the Centre

The Constitution imposes two key restrictions on the executive power of states to ensure that the Centre can exercise its executive power without limitations. Specifically, the executive power of each state must:

  1. Ensure compliance with laws made by Parliament and any applicable existing laws.
  2. Not impede or prejudice the exercise of the Centre’s executive power in the state.

The first restriction places a general obligation on the states, while the second imposes a specific duty not to hinder the Centre’s executive functions.

In both cases, the Centre has the authority to issue directions to the states as necessary. These directions carry coercive force. According to Article 365, if a state fails to comply with or implement any directions from the Centre, the President may determine that the state’s government cannot function in accordance with the Constitution. In such a case, the President’s rule may be imposed in the state under Article 356.

Centre’s Directions to the States

In addition to the previously mentioned cases, the Centre has the authority to issue directions to the states concerning the exercise of their executive powers in the following areas:

  1. The construction and maintenance of means of communication deemed to be of national or military importance by the state.
  2. Measures for the protection of railways within the state.
  3. Provision of adequate facilities for instruction in the mother tongue at the primary education level for children belonging to linguistic minority groups in the state.
  4. Formulation and implementation of specific schemes for the welfare of Scheduled Tribes in the state.

The coercive sanction outlined in Article 365 also applies in these cases, ensuring compliance with the Centre’s directions.

Mutual Delegation of Functions

The division of legislative powers between the Centre and the states is rigid, meaning the Centre cannot delegate its legislative powers to the states, and a single state cannot ask Parliament to legislate on a matter within the state’s jurisdiction. While the distribution of executive powers generally follows the same pattern, this rigid division may sometimes lead to conflicts. To address this, the Constitution allows for the mutual delegation of executive functions between the Centre and the states to resolve potential deadlocks.

The President may, with the state government’s consent, entrust some of the Centre’s executive functions to the state government. Similarly, the Governor of a state, with the consent of the Central government, may assign certain state executive functions to the Centre. Such delegation can be either conditional or unconditional.

Furthermore, the Constitution permits the delegation of the Centre’s executive functions to a state without the state’s consent, though this delegation is done through Parliament, not the President. In such cases, a law made by Parliament on a subject in the Union List may confer powers or impose duties on a state, or empower the Centre to assign powers and duties to the state, even without the state’s consent. However, this cannot be done by a state legislature itself.

In conclusion, the mutual delegation of functions between the Centre and the state can occur either by agreement or legislation. While the Centre can use both methods, the state may only engage in delegation through agreement.

Cooperation Between the Centre and States

The Constitution includes several provisions to ensure cooperation and coordination between the Centre and the states:

  1. Dispute Resolution on Inter-State Water Issues: The Parliament has the power to provide for the adjudication of any dispute or complaint concerning the use, distribution, and control of the waters of inter-state rivers and river valleys.
  2. Inter-State Council: Under Article 263, the President can establish an Inter-State Council to investigate and discuss matters of common interest between the Centre and the states. Such a council was set up in 1990.
  3. Recognition of Public Acts: Full faith and credit must be given across India to public acts, records, and judicial proceedings of the Centre and all states.
  4. Interstate Trade and Commerce: The Parliament can appoint an authority to oversee the constitutional provisions relating to the freedom of interstate trade, commerce, and intercourse. However, no such authority has been established as of now.

All-India Services

In addition to the separate public services for the Centre and the states (Central Services and State Services), India also has All-India Services: the Indian Administrative Service (IAS), Indian Police Service (IPS), and Indian Forest Service (IFS). These officers hold key positions at both the Centre and state levels, serving in various capacities by turns. The members of these services are recruited and trained by the Centre.

These services are jointly controlled by the Centre and the states, with ultimate control vested in the Central government, while immediate control lies with the respective state governments.

The Indian Civil Service (ICS) was replaced in 1947 by the IAS, and the Indian Police (IP) was replaced by the IPS, both recognized by the Constitution as All-India Services. In 1966, the IFS was created as the third All-India Service. According to Article 312, the Parliament can create new All-India Services upon a resolution by the Rajya Sabha.

Each of these services operates as a unified service, regardless of state divisions, with common rights, status, and uniform pay scales across the nation.

While the existence of these services might appear to limit state autonomy under the federal structure, they are justified for several reasons:

  1. High Standards of Administration: They help maintain high standards of governance both at the Centre and in the states.
  2. Uniformity: They ensure consistency in the administrative system across the country.
  3. Cooperation and Coordination: They facilitate collaboration, coordination, and joint action on issues of mutual concern between the Centre and the states.

Dr. B.R. Ambedkar, justifying the creation of All-India Services during the Constituent Assembly debates, stated that every federal system has dual services—one for the Centre and one for the states. He emphasized that certain strategic posts, crucial for maintaining the standard of administration, should be held by officers from an All-India Service. These officers, recruited on a national level, would ensure the highest quality of administration across the Union without undermining the rights of states to form their own civil services.

Public Service Commissions

In terms of public service commissions, the Centre-state relations are outlined as follows:

  1. State Public Service Commissions: Although the Chairman and members of a state public service commission are appointed by the governor, their removal can only be carried out by the President.
  2. Joint State Public Service Commission: The Parliament has the power to establish a Joint State Public Service Commission (JSPSC) for two or more states upon the request of the concerned state legislatures. The President appoints the chairman and members of the JSPSC.
  3. Union Public Service Commission (UPSC): The UPSC can assist a state upon the request of the state’s governor and with the President’s approval.
  4. Joint Recruitment Schemes: The UPSC can also help two or more states in creating and implementing schemes for joint recruitment when special qualifications are required.

Integrated Judicial System

Although India follows a federal polity, it does not have a dual system of justice. The Constitution establishes an integrated judicial system with the Supreme Court at the apex and state high courts beneath it. This unified system enforces both central and state laws, ensuring uniformity in legal procedures.

  • Appointment and Transfer of Judges: The judges of state high courts are appointed by the President, after consultation with the Chief Justice of India and the state governor. They can also be transferred or removed by the President.
  • Common High Courts: The Parliament can create a common high court for multiple states. For instance, Maharashtra and Goa, as well as Punjab and Haryana, share common high courts.

Relations During Emergencies

  1. National Emergency (Article 352): During a national emergency, the Centre gains the authority to issue executive directions to a state on any matter, bringing the state government under the Centre’s full control, though the state is not suspended.
  2. President’s Rule (Article 356): If President’s Rule is imposed in a state, the President can assume the functions of the state government and take on the powers vested in the Governor or any other state authority.
  3. Financial Emergency (Article 360): During a financial emergency, the Centre can direct states to adhere to financial propriety and may impose further necessary actions, such as reducing salaries of state personnel.

Other Provisions

The Constitution also provides the following provisions to enable the Centre to oversee state administration:

  1. Article 355: The Centre has two duties: (a) to protect each state from external aggression and internal disturbance, and (b) to ensure that each state’s government operates in line with the provisions of the Constitution.
  2. Governor’s Role: The governor of a state is appointed by the President and serves at their pleasure. Beyond being the constitutional head of the state, the governor acts as the Centre’s representative, submitting periodic reports on the state’s administrative affairs.
  3. State Election Commissioner: Though the state election commissioner is appointed by the state governor, their removal is under the authority of the President.

Extra-Constitutional Devices

In addition to constitutional mechanisms, there are extra-constitutional bodies that promote cooperation and coordination between the Centre and the states. These include various advisory bodies and conferences at the national level:

  • Advisory Bodies: Examples include NITI Aayog (which replaced the Planning Commission), the National Integration Council, the Central Council of Health and Family Welfare, the Zonal Councils, and others.
  • Conferences for Centre-State Consultation: Several conferences facilitate discussions between the Centre and 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)
    • Inspector-General of Police Conference
    • Chief Justices’ Conference (presided over by the Chief Justice of India)
    • Vice-Chancellors’ Conference
    • Home Ministers’ Conference (presided over by the Central Home Minister)
    • Law Ministers’ Conference (presided over by the Central Law Minister)
Article No.Subject Matter
256Obligation of states and the Union
257Control of the Union over states in certain cases
257AAssistance to states by deployment of armed forces or other forces of the Union (Repealed)
258Power of the Union to confer powers, etc., on states in certain cases
258APower of the states to entrust functions to the Union
259Armed Forces in states in Part B of the First Schedule (Repealed)
260Jurisdiction of the Union in relation to territories outside India
261Public acts, records, and judicial proceedings
262Adjudication of disputes relating to waters of interstate rivers or river valleys
263Provisions with respect to an inter-state Council

Financial Relations

Articles 268 to 293 of the Constitution address the financial relations between the Centre and the states, along with other provisions related to the same subject. These can be grouped under the following categories:

Allocation of Taxing Powers

The Constitution outlines the distribution of taxing powers between the Centre and the states as follows:

  • Union List: The Parliament has exclusive power to levy taxes on subjects enumerated in the Union List, which contains 13 items.
  • State List: The state legislature has exclusive power to levy taxes on subjects listed in the State List, which includes 18 items.
  • Concurrent List: There are no tax entries in the Concurrent List, meaning there is no concurrent jurisdiction for tax legislation. However, the 101st Amendment Act of 2016 created an exception by providing for the concurrent jurisdiction of both Parliament and state legislatures regarding the Goods and Services Tax (GST).
  • Residuary Powers: The residuary power of taxation, i.e., the power to impose taxes not listed in any of the three lists, is vested in the Parliament. Under this power, Parliament has imposed taxes such as gift tax, wealth tax, and expenditure tax.

The Constitution also distinguishes between the power to levy and collect taxes and the power to appropriate the proceeds of those taxes. For example, while the Centre levies and collects income tax, the proceeds are shared between the Centre and the states.

Restrictions on State Taxing Powers

The Constitution places several restrictions on the taxing powers of the states:

  1. Tax on Professions, Trades, Callings, and Employments: A state legislature may levy taxes on these activities, but the total amount payable by any person cannot exceed ₹2,500 annually.
  2. Tax on Supply of Goods or Services: States are prohibited from imposing taxes on the supply of goods or services (or both) in two cases:
    • When the supply takes place outside the state.
    • When the supply occurs in the course of import or export. Parliament has the authority to define when a supply of goods or services takes place outside the state or in the course of import/export.
  3. Tax on Electricity: A state can tax the consumption or sale of electricity, but the following are exempt:
    • Electricity consumed by or sold to the Centre.
    • Electricity consumed in the construction, maintenance, or operation of any railway by the Centre or a railway company, or sold to the Centre or the railway company for this purpose.
  4. Tax on Water or Electricity Used for Interstate River Projects: A state legislature can tax water or electricity used by authorities established by Parliament for regulating or developing an interstate river or river valley. However, such a law must be reserved for the President’s consideration and receive his assent to be effective.

Distribution of Tax Revenues

The 80th Amendment Act of 2000 and the 101st Amendment Act of 2016 have significantly altered the framework for the distribution of tax revenues between the Centre and the states. These amendments brought about key changes following recommendations made by the 10th Finance Commission and the introduction of the Goods and Services Tax (GST).

The 80th Amendment (2000)

This amendment was enacted to implement the recommendations of the 10th Finance Commission, which suggested that 29% of the income from certain central taxes and duties should be allocated to the states. This came into effect retroactively from April 1, 1996, and is known as the “Alternative Scheme of Devolution.” It brought several central taxes, including Corporation Tax and Customs Duties, on par with Income Tax (excluding agricultural income) in terms of their distribution to the states.

The 101st Amendment (2016)

The 101st Amendment facilitated the introduction of the Goods and Services Tax (GST), a new tax regime designed to simplify the taxation process. GST is levied by both the Parliament and state legislatures on transactions involving the supply of goods and services. This amendment also subsumed various central and state taxes, such as Excise Duty, Service Tax, Central Sales Tax, and VAT, into GST. Additionally, it removed provisions related to Service Tax, which was previously added by the 88th Amendment Act of 2003.

Current Distribution of Tax Revenues

A. Taxes Levied by the Centre but Collected and Appropriated by the States (Article 268):
This category includes stamp duties on documents like bills of exchange, promissory notes, policies of insurance, and others. The proceeds from these duties, levied within a state, are assigned to the state and do not form part of the Consolidated Fund of India.

B. Taxes Levied and Collected by the Centre but Assigned to the States (Article 269):
The following taxes are collected by the Centre but assigned to the states:

  1. Taxes on the sale or purchase of goods (other than newspapers) in the course of interstate trade or commerce.
  2. Taxes on the consignment of goods in the course of interstate trade or commerce.

The net proceeds from these taxes are not part of the Consolidated Fund of India and are allocated to the states according to principles laid down by Parliament.

C. Levy and Collection of GST in Interstate Trade (Article 269-A):
GST levied on transactions involving interstate trade or commerce is collected by the Centre. However, the revenue from this tax is shared between the Centre and the states as per the provisions outlined by Parliament, following recommendations from the GST Council.

D. Taxes Levied and Collected by the Centre but Shared with States (Article 270):
This category includes all taxes and duties mentioned in the Union List, excluding:

  1. Taxes and duties mentioned in Articles 268, 269, and 269-A.
  2. Surcharges and cesses as specified in Article 271.
  3. Cess levied for specific purposes.

The distribution of these taxes is determined by the President on the recommendation of the Finance Commission.

E. Surcharge on Certain Taxes and Duties for the Centre (Article 271):
The Parliament may levy surcharges on taxes and duties mentioned in Articles 269 and 270. The proceeds from these surcharges are exclusively allocated to the Centre, and states do not receive any share. However, the GST is exempt from this surcharge.

F. Taxes Levied, Collected, and Retained by the States:
These are taxes exclusively belonging to the states, listed in the State List. There are 18 such taxes, including:

  1. Land revenue
  2. Taxes on agricultural income
  3. Estate duty on agricultural land
  4. Taxes on buildings, mineral rights, and excise on alcoholic liquors
  5. Taxes on the sale of electricity, petroleum, and alcoholic liquor (except in interstate commerce)
  6. Taxes on goods and passengers carried by road or inland waterways
  7. Taxes on vehicles, animals, boats, and tolls
  8. Professions, trades, and employment taxes
  9. Entertainment taxes levied by local bodies
  10. Stamp duties (except those in the Union List)
  11. Fees on matters in the State List (excluding court fees)

These taxes are entirely within the purview of the states and do not get shared with the Centre.

Distribution of Non-Tax Revenues

A. The Centre
The primary sources of non-tax revenues for the Centre include the following:

  1. Posts and telegraphs
  2. Railways
  3. Banking
  4. Broadcasting
  5. Coinage and currency
  6. Central public sector enterprises
  7. Escheat and lapse
  8. Other miscellaneous sources

B. The States
For the states, the major sources of non-tax revenues are:

  1. Irrigation
  2. Forests
  3. Fisheries
  4. State public sector enterprises
  5. Escheat and lapse
  6. Other miscellaneous sources

Grants-in-Aid to the States

In addition to the sharing of taxes between the Centre and the states, the Constitution also provides for grants-in-aid from the Centre’s resources to assist states. These grants are of two types: statutory grants and discretionary grants.

Statutory Grants

Article 275 empowers Parliament to make grants to states in need of financial assistance. These grants are not applicable to every state, and the amounts may vary depending on the needs of each state. The grants are charged annually on the Consolidated Fund of India.

In addition to this general provision, the Constitution specifies grants to promote the welfare of scheduled tribes in a state or to improve the administration of scheduled areas, including the state of Assam.

Statutory grants, both general and specific, are provided to states based on the recommendations of the Finance Commission.

Discretionary Grants

Article 282 grants both the Centre and the states the authority to make grants for public purposes, even if such purposes fall outside their legislative competence. These grants are referred to as discretionary grants because the Centre is not obligated to provide them; the decision is within its discretion.

Discretionary grants serve two purposes:

  1. They assist states in achieving their financial goals for development plans.
  2. They give the Centre leverage to influence and coordinate state actions in line with the national plan.

Other Grants

The Constitution also includes provisions for temporary grants-in-aid. For example, grants were made in lieu of export duties on jute and jute products for the states of Assam, Bihar, Orissa, and West Bengal. These grants were set to continue for ten years from the commencement of the Constitution. These sums were charged to the Consolidated Fund of India and were distributed to the states based on the recommendations of the Finance Commission.

Goods and Services Tax (GST) Council

The efficient administration of the Goods and Services Tax (GST) requires collaboration and coordination between the Centre and the States. To facilitate this, the 101st Amendment Act of 2016 established the Goods and Services Tax Council (GST Council).

Article 279-A empowers the President to constitute the GST Council by an order. The Council acts as a joint forum for both the Centre and the States. Its role is to provide recommendations to the Centre and the States on the following matters:

  • The taxes, cesses, and surcharges levied by the Centre, States, and local bodies that will be merged into the GST.
  • The goods and services that will be subject to GST or exempt from it.
  • The model GST laws, principles of levy, apportionment of GST on inter-state trade or commerce, and the rules governing the place of supply.
  • The threshold turnover limit below which goods and services may be exempt from GST.
  • The GST rates, including floor rates with bands.
  • Any special rate or rates for a specified period to generate additional resources during a natural calamity or disaster.

Finance Commission

Article 280 establishes the Finance Commission, a quasi-judicial body constituted by the President every five years (or earlier). The Commission is responsible for making recommendations to the President on:

  • The distribution of net tax proceeds between the Centre and the States, including the allocation of these proceeds among the States.
  • The principles governing grants-in-aid from the Centre to the States, sourced from the Consolidated Fund of India.
  • Measures to augment the resources of the State Consolidated Fund and to support the panchayats and municipalities within a state based on the recommendations of the State Finance Commission.
  • Any other matter referred to the Commission by the President to ensure sound financial management.

Before 1960, the Commission also recommended payments to the States of Assam, Bihar, Orissa, and West Bengal in lieu of export duties on jute and jute products.

The Finance Commission is regarded as the cornerstone of fiscal federalism in India.

Protection of the States’ Interests

To safeguard the interests of the States in financial matters, the Constitution stipulates that certain bills can only be introduced in Parliament with the President’s recommendation:

  • A bill that imposes or alters a tax or duty that affects the States.
  • A bill that changes the definition of “agricultural income” for purposes of income tax laws.
  • A bill that affects the distribution of funds to the States.
  • A bill that imposes any surcharge on a specified tax or duty for the Centre.

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

  • A tax or duty, or part of its net proceeds, assigned to any state.
  • A tax or duty that contributes to sums payable to a state from the Consolidated Fund of India.

The “net proceeds” of a tax or duty are calculated after deducting the cost of collection. The Comptroller and Auditor General of India certifies the net proceeds, and their certification is final.

Borrowing Powers of the Centre and the States

The Constitution outlines the borrowing powers of both the Centre and the States:

  • The Central Government can borrow within India or abroad, using the security of the Consolidated Fund of India. It can also provide guarantees for loans, subject to limits set by Parliament. However, no law has yet been enacted by Parliament to specify these limits.
  • State Governments can borrow only within India, using the security of the Consolidated Fund of the State, and can provide guarantees, subject to limits set by the state’s legislature.
  • The Central Government can also make loans to any state or provide guarantees for loans raised by a state. The required sums for these loans are charged to the Consolidated Fund of India.
  • A state cannot raise a loan without the Centre’s consent if it still has outstanding loans made by the Centre or loans for which the Centre has provided a guarantee.

Inter-Governmental Tax Immunities

Like other federal systems, the Indian Constitution incorporates the principle of “immunity from mutual taxation,” which provides certain protections against taxation by one level of government on the other. The Constitution contains specific provisions to this effect:

Exemption of Central Property from State Taxation

The property of the Centre is exempt from all taxes imposed by state governments or any local authority within a state, such as municipalities, district boards, or panchayats. However, Parliament has the authority to override this exemption. The term “property” includes lands, buildings, chattels, shares, debts, and all assets that have monetary value, whether movable or immovable, tangible or intangible. The property can be used for either sovereign functions (e.g., the armed forces) or commercial purposes.

It is important to note that corporations or companies established by the Central Government are not exempt from state or local taxes. This is because such corporations are distinct legal entities.

Exemption of State Property or Income from Central Taxation

The property and income of the state are exempt from Central taxation. These income sources may be derived from either sovereign functions or commercial activities. However, the Centre can levy taxes on the commercial activities of a state, provided Parliament specifically allows for it. Furthermore, Parliament may designate certain trades or businesses as incidental to the routine functions of government, thus exempting them from taxation.

Local authorities within a state are not exempt from Central taxation. Similarly, the Centre has the power to tax the property or income of corporations and companies owned by the state.

In a 1963 advisory opinion, the Supreme Court ruled that the immunity granted to a state from Central taxation does not extend to customs or excise duties. This means that the Centre can impose customs duties on goods imported or exported by a state, and excise duties on goods produced or manufactured by a state.

Effects of Emergencies on Centre-State Financial Relations

During periods of emergency, the financial relations between the Centre and the states undergo specific changes:

National Emergency

During the declaration of a national emergency under Article 352, the President has the authority to modify the constitutional distribution of revenue between the Centre and the states. This modification allows the President to reduce or suspend the transfer of finances (both tax-sharing and grants-in-aid) from the Centre to the states. These changes remain in effect until the end of the financial year in which the emergency ends.

Financial Emergency

When a financial emergency is proclaimed under Article 360, the Centre gains the power to issue directives to the states. These directives may include:

  1. Observing specific financial propriety standards.
  2. Reducing the salaries and allowances of all personnel serving in the state.
  3. Reserving all money bills and other financial legislation for the consideration of the President.

Articles Relating to Centre-State Financial Relations at a Glance

Article No.Subject Matter
268Duties levied by the Union but collected and appropriated by the States
268AService tax levied by the Union and collected and appropriated by the Union and the States (Repealed)
269Taxes levied and collected by the Union but assigned to the States
269ALevy and collection of Goods and Services Tax in the course of inter-state trade or commerce
270Taxes levied and distributed between the Union and the States
271Surcharge on certain duties and taxes for the purposes of the Union
272Taxes levied and collected by the Union that may be distributed between the Union and the States (Repealed)
273Grants in lieu of export duty on jute and jute products
274Prior recommendation of the President required for bills affecting taxation in which States are interested
275Grants from the Union to certain States
276Taxes on professions, trades, callings, and employments
277Savings
278Agreement with States in Part B of the First Schedule regarding certain financial matters (Repealed)
279Calculation of “net proceeds,” etc.
279AGoods and Services Tax Council
280Finance Commission
281Recommendations of the Finance Commission
282Expenditure defrayable by the Union or a State out of its revenues
283Custody of Consolidated Funds, Contingency Funds, and moneys credited to the public accounts
284Custody of suitors’ deposits and other moneys received by public servants and courts
285Exemption of property of the Union from State taxation
286Restrictions on the imposition of tax on the sale or purchase of goods
287Exemption from taxes on electricity
288Exemption from taxation by States in respect of water or electricity in certain cases
289Exemption of property and income of a State from Union taxation
290Adjustment in respect of certain expenses and pensions
290AAnnual payment to certain Devaswom Funds
291Privy purse sums of Rulers (Repealed)
292Borrowing by the Government of India
293Borrowing by States

Smooth Relations Before 1967: Until 1967, relations between the Centre and the states were relatively smooth due to the dominance of a single political party, the Congress, at both levels of government.

The Shift Post-1967: The 1967 elections marked a turning point as the Congress party lost power in nine states and faced a weakened position at the Centre. This shift ushered in a new phase of Centre-state relations. Non-Congress state governments began opposing the increasing centralization and intervention by the Centre. They raised demands for greater state autonomy, including enhanced powers and financial resources, leading to tensions and conflicts in Centre-state dynamics.

Areas of Tension in Centre-State Relations

The following issues contributed to disputes between the Centre and the states:

  1. Appointment and dismissal of governors.
  2. Partisan and discriminatory roles played by governors.
  3. Imposition of President’s Rule for political purposes.
  4. Deployment of Central forces in states for maintaining law and order.
  5. Reservation of state bills for Presidential assent.
  6. Discrimination in financial allocations to states.
  7. The role of the Planning Commission in approving state projects.
  8. Management of All-India Services (IAS, IPS, and IFS).
  9. Use of electronic media for political propaganda.
  10. Appointment of inquiry commissions against chief ministers.
  11. Inequitable sharing of finances between the Centre and states.
  12. Encroachment by the Centre into matters under the State List.

Major Developments in Centre-State Relations

Administrative Reforms Commission (ARC)

In 1966, the Central government set up a six-member Administrative Reforms Commission (ARC) under Morarji Desai (later chaired by K. Hanumanthayya) to examine Centre-state relations.

The ARC constituted a study team led by M.C. Setalvad, whose report formed the basis of the ARC’s final recommendations in 1969. The key recommendations included:

  • Establishing an Inter-State Council under Article 263 of the Constitution.
  • Appointing experienced, non-partisan individuals as governors.
  • Delegating maximum powers to the states.
  • Transferring more financial resources to reduce states’ dependence on the Centre.
  • Allowing deployment of Central forces in states only upon request or in exceptional cases.

No action was taken on these recommendations.

Rajamannar Committee

In 1969, the Tamil Nadu government (led by the DMK) formed a three-member committee under Dr. P.V. Rajamannar to review Centre-state relations and propose constitutional amendments for greater state autonomy.

Key recommendations included:

  1. Immediate establishment of an Inter-State Council.
  2. Making the Finance Commission a permanent body.
  3. Replacing the Planning Commission with a statutory body.
  4. Repealing Articles 356, 357, and 365 (relating to President’s Rule).
  5. Eliminating the governor’s discretionary power to dismiss state ministries.
  6. Transferring certain Union and Concurrent List subjects to the State List.
  7. Allocating residuary powers to the states.
  8. Abolishing All-India Services (IAS, IPS, and IFS).

The Central government ignored these recommendations.

Anandpur Sahib Resolution

In 1973, the Akali Dal adopted the Anandpur Sahib Resolution, which demanded a federal structure with limited Centre jurisdiction over defense, foreign affairs, communications, and currency. Residuary powers and equal representation at the Centre were sought for the states.

West Bengal Memorandum

In 1977, the Communist government in West Bengal submitted a memorandum on Centre-state relations. The key suggestions were:

  1. Replacing the term “Union” with “Federal” in the Constitution.
  2. Restricting the Centre’s jurisdiction to defense, foreign affairs, currency, communications, and economic coordination.
  3. Allocating residuary powers to the states.
  4. Repealing Articles 356, 357, and 360 (financial emergency).
  5. Making state consent mandatory for the formation or reorganization of states.
  6. Allocating 75% of revenue raised by the Centre to the states.
  7. Granting the Rajya Sabha equal powers with the Lok Sabha.
  8. Abolishing All-India Services and establishing separate Central and state services.

The Central government rejected these demands.

Sarkaria Commission

In 1983, the Central government established a three-member Commission on Centre-State relations, chaired by R.S. Sarkaria, a retired Supreme Court judge. The Commission was tasked with examining and reviewing the functioning of existing arrangements between the Centre and states in all spheres and recommending suitable changes. Initially given one year, its term was extended four times, and it submitted its report in 1988.

The Sarkaria Commission did not advocate structural changes, stating that the existing constitutional framework and principles were fundamentally sound. However, it emphasized the need for improvements in functional and operational aspects. The Commission noted that federalism should be seen as a dynamic system for cooperative action rather than a rigid institutional concept. It rejected calls to reduce the Centre’s powers, asserting that a strong Centre was essential for maintaining national unity and integrity, especially in the face of divisive tendencies. At the same time, it warned against over-centralization, which it likened to causing “blood pressure at the Centre and anaemia at the periphery.”

Key Recommendations of the Sarkaria Commission

The Commission made 247 recommendations to improve Centre-State relations. Below are the major recommendations:

  1. Inter-State Council: Establish a permanent Inter-State Council called the Inter-Governmental Council under Article 263.
  2. President’s Rule: Use Article 356 (President’s Rule) sparingly, as a last resort when all other alternatives fail.
  3. All-India Services: Strengthen existing All-India Services and create more such services.
  4. Residuary Powers: Retain residuary taxation powers with Parliament, while placing other residuary powers in the Concurrent List.
  5. State Bills: If the President withholds assent to state bills, the reasons should be communicated to the respective state government.
  6. National Development Council: Rename and restructure the National Development Council (NDC) as the National Economic and Development Council (NEDC).
  7. Zonal Councils: Reactivate and reconstitute zonal councils to promote federal cooperation.
  8. Deployment of Armed Forces: Allow the Centre to deploy armed forces in states without their consent, though consultation with states is desirable.
  9. Concurrent List Legislation: Require the Centre to consult states before legislating on matters in the Concurrent List.
  10. Governor Appointments: Include in the Constitution a formal procedure for consulting the Chief Minister during the appointment of the state governor.
  11. Corporation Tax: Allow states to share the net proceeds of the corporation tax.
  12. Governor’s Authority: Prevent governors from dismissing the council of ministers as long as it retains majority support in the legislative assembly.
  13. Governor’s Tenure: Ensure a governor’s five-year term is undisturbed except under compelling circumstances.
  14. State Minister Inquiries: Prohibit setting up commissions of inquiry against state ministers unless demanded by Parliament.
  15. Surcharge on Income Tax: Restrict the Centre’s levy of surcharges on income tax to specific purposes and limited durations.
  16. Finance and Planning Commission: Retain the current division of functions between the Finance Commission and the Planning Commission.
  17. Three-Language Formula: Implement the three-language formula uniformly and in its true spirit.
  18. Radio and Television: Oppose autonomy for radio and television but decentralize their operations.
  19. Rajya Sabha and State Reorganization: Maintain the current role of the Rajya Sabha and the Centre’s authority to reorganize states.
  20. Linguistic Minorities: Revive the Commissioner for Linguistic Minorities and make it more effective.

Out of the 247 recommendations, the Central government implemented 180. One of the most significant outcomes was the establishment of the Inter-State Council in 1990.

Punchhi Commission: Overview and Key Recommendations

The Second Commission on Centre-State Relations, chaired by former Chief Justice of India Madan Mohan Punchhi, was established by the Government of India in April 2007. This commission aimed to address the changing dynamics of Centre-State relations since the Sarkaria Commission’s report, submitted over two decades earlier. The commission focused on the evolving political, social, and economic landscape and its implications on governance.

Terms of Reference

The Punchhi Commission was tasked with examining and recommending changes to the Centre-State framework in various areas, such as:

  • Legislative and Administrative Relations: Reviewing powers, responsibilities, and the functioning of the Centre and states.
  • Governors’ Role: Evaluating their jurisdiction and responsibilities, especially in emergency provisions.
  • Panchayati Raj Institutions: Promoting devolution of powers to local governments.
  • Economic and Social Planning: Addressing financial relations and inter-state resource sharing.
  • Inter-State Coordination: Suggestions for smoother dispute resolution mechanisms, including for inter-state rivers.

The commission also explored challenges related to governance, national security, and socio-economic development in the new millennium.

Key Recommendations

  1. Legislative and Administrative Relations
    • Broad agreements between the Union and states should precede legislation on Concurrent List subjects.
    • The Union should exercise restraint in asserting supremacy over matters assigned to states.
    • Strengthening the auditing role of the Inter-State Council for issues in concurrent or overlapping jurisdiction.
  2. Governor’s Role
    • Governors should have a fixed tenure of five years and should not be removed arbitrarily.
    • Clear guidelines for appointing Chief Ministers in hung assemblies:
      • Pre-poll alliances should be treated as a single entity.
      • Post-election coalitions should follow a hierarchy of support (e.g., single largest party, coalitions).
    • Decisions on state bills by Governors must be made within six months.
    • Governors should focus on constitutional roles, avoiding statutory responsibilities like chancellorships of universities.
  3. Emergency Provisions
    • Article 356 (President’s Rule) should only be invoked as a last resort, in strict adherence to the S.R. Bommai judgment.
    • Introducing a framework for localized emergencies under Article 355 to address specific issues without dissolving state assemblies.
  4. Inter-State and Centre-State Coordination
    • Amendments to Article 263 to make the Inter-State Council a robust dispute resolution platform.
    • Zonal Councils should meet twice annually to enhance cooperation.
    • Establish an Inter-State Trade and Commerce Commission to ensure a unified domestic market.
  5. Financial Relations
    • Regular revision of royalty rates on minerals and timely compensation to states.
    • Elimination of the ceiling on profession tax through constitutional amendments.
    • Greater coordination between the Finance Commission and Planning Commission.
    • Review of all cesses and surcharges by the Centre to balance fiscal relations.
  6. Devolution of Powers
    • Constitutionally defining the scope of devolution to Panchayati Raj Institutions and local bodies.
    • Ensuring Central legislations involving states provide for cost-sharing.
  7. All-India Services and Judiciary
    • Creation of new All-India Services for health, education, engineering, and judiciary.
    • Improving the representation of states in the Rajya Sabha to balance Centre-State power dynamics.
  8. Miscellaneous Recommendations
    • Establish a permanent Finance Commission Secretariat under the Ministry of Finance.
    • Strengthen independent district-level planning and budgeting.
    • Institutionalize forums for Chief Ministers to coordinate policies in sectors like energy, education, and health.

Implementation and Consideration

The Punchhi Commission submitted its detailed 1,456-page report in April 2010, which included over 310 recommendations. It drew insights from previous reports like those of the Sarkaria Commission, the National Commission to Review the Working of the Constitution (NCRWC), and the Second Administrative Reforms Commission.

The report was circulated to all stakeholders, including state governments, union territories, and relevant ministries, for their feedback. The recommendations are under review by the Inter-State Council for further action.

The Punchhi Commission’s emphasis on cooperative federalism, balanced devolution of powers, and reforms to address emerging challenges reflects its commitment to ensuring India’s unity, integrity, and socio-economic progress.

Conclusion

The Centre-state relationship in India has undergone significant strain since the late 1960s due to competing political interests and demands for greater state autonomy. Despite various committees, commissions, and resolutions, most recommendations for balancing powers have been overlooked or ignored, leaving the federal structure a subject of ongoing debate and contention.


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