Taxation powers of Union and States

Division of financial powers and functions among different levels of the federal polity are asymmetrical, with a pronounced bias for revenue taxing powers at the Union level while the States carry the responsibility for subjects that affect the day to day life of the people entailing larger expenditure than can be met from their own resources.

On an average, the revenue of States from their own resources suffices only for about 50 to 60 percent of States’ current expenditure.

Since the insufficiency of the States’ fiscal resources had been foreseen at the time of framing the Constitution, a mechanism in the shape of Finance Commission was provided under article 280 for financial transfers from the Union.

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Its function is to ensure orderly and judicious devolution that is deemed necessary from the point of view of avoiding vertical or horizontal imbalances.

The Finance Commission is only one stream of transfer of resources from the Union to the States. The Planning Commission now NITI Ayog advises the Union Government regarding the desirable transfer of resources to the States over and above those recommended by the Finance Commission.

Syllabus GS Mains-Paper II FUNCTIONS AND RESPONSIBILITIES OF THE UNION AND STATES Questions Q.1 Though the federal principle is dominant in our Constitution and that principle is one of its basic features, but it is equally true that federalism under the Indian Constitution leans infavour of a strong Centre. How the principle will satisfy the economic inclusion in the country? Q2. The concept of cooperative federalism has been increasingly emphasized in recent years. The Cooperative federalism can build the social and physical infrastructure for the people of India. Discuss

Bulk of the transfer of revenue and capital resources from the Union to the States is determined largely on the advice of these two Commissions. By and large, such transfers are formula-based. Then there are some discretionary transfers as well to meet the exigencies of specific situations in individual States.

These institutional arrangements served the country well in the first three decades after independence. Testifying to the strength of these institutions neither the Union nor the States suffered from any large imbalance in their budgets, although the size of the public sector in terms of proportion of government expenditure to GDP had nearly doubled during this period.

Imbalances have become endemic during the last two decades and have assumed alarming proportions recently. For this state of affairs, the constitutional provisions can hardly be blamed. Broadly, the causes have to be sought in the working of the political institutions.

There are shortcomings in the transfer system. For example, the ‘gap-filling’ approach adopted by the Finance Commission and the soft budget constraints have provided perverse incentives. The point, however, is that these deficiencies are capable of being corrected without any change in the Constitution.

Enlargement of the scope of the Finance Commission
The institution of the Finance Commission has been one of the major success stories of the Constitution. The broad terms of reference as laid down in article 280(3) are unexceptionable.

However, other matters in the interest of sound finance can also be referred to the Finance Commission. These would constitute additional terms of reference. It has been suggested that it would be desirable to associate the States more actively in deciding the additional terms of reference, preferably by having the NITI Ayog to endorse the additional terms of reference.

The Commission is not in favour of an amendment of article 280(3)(d) to enable such enlargement of the scope of the Finance Commission, However, it is recommended that terms of reference of the Finance Commission should be broader and comprise of matters which would take care, in a comprehensive way, aspects of the financial relations between the Union and the States.

The broadening of such terms of reference could also be discussed earlier by the National Development Council.

Under article 281, the recommendations of the Finance Commission are laid before the Houses of Parliament along with an explanatory memorandum as to the action taken on them.

The recommendations are not theoretically binding, although there has been no case so far when the Government of India has deviated from recommendations of successive Finance Commissions.

It has been suggested that the Constitution itself should describe the recommendations as an award binding on both the Union and the States.

This has been urged in the context of the mechanism of the State Finance Commissions which are set up under articles 243-I and 243-Y which too make only recommendations and not awards. The State Finance Commissions are a comparatively new constitutional mechanism.

They would take some time to strike roots in the constitutional soil. Politicians at the State level have also to find their bearings in the new landscape where the old landmarks of patronage at the State level have yielded place to a non-discriminatory passage of resources from the State exchequer to the local government institutions.

Keeping in view the factors pointed out above the Commission does not consider it necessary to recommend the amendment of the Constitution to provide for the recommendations of either the Finance Commission constituted under article 280 or of the State Finance Commissions constituted under articles 243-I and 243-Y being treated as awards.

Share of States in taxes, cesses and surcharges
The Constitution was amended to provide a prescribed percentage of the revenue receipts to be transferred to States (article 270(2)). However, surcharges and cesses do not form part of the divisible pool.

Cesses are intended for specific purposes and the States can have no complaint if the money is spent on predetermined purposes. Surcharges can be regarded as a not so thinly veiled device to deny the States their share in receipts from such surcharges.

Keeping in view the complexity of the present national and international situation which has placed additional burden on the Union, the Commission would not recommend any constitutional amendment to make surcharges shareable but would expect public policy to move decisively in the direction of doing away with the surcharges as part of the Union’s fiscal armory.

Tax on services
In recent years, services have emerged as the dominant component in the gross domestic product (GDP). Yet there is no mention in the Constitution in any of the three lists (Union List, State List, Concurrent List) enabling any level of government to tax services.

The Union has used the residuary power in the last entry of the Union List (entry 97) to levy taxes on selected services. The efforts have not succeeded in tapping the full potential of the service sector of a vast range of services which are primarily local in nature.

It is necessary to enhance the revenue potential of the States in view of their major responsibilities for social and physical infrastructure. It might be worthwhile to provide explicitly for taxing power for the States in respect of certain specified services.

For the Union also an explicit entry would be helpful, rather than leaving it to the residuary power of entry 97. However, it may be better to first let a consensus list of services to be taxed by the States come into force to be treated as the exclusive domain of the States, even if the formal taxing power is exercised by the Union. In other words, the golden rule here would be to hasten slowly.

A de facto enumeration of services that can be taxed exclusively by the States should get priority from policy makers with a view to augmenting the resource pool of the States. The Commission recommends specific enumeration of services that may become amenable to taxation by the States.

This is necessary with a view to augmenting the resource pool of the States. The Commission recommends an appropriate amendment to the Constitution in this behalf to include certain taxes, now levied and collected by the Union, to be enabled to be levied and collected by the States. Illustratively a list of such subjects in respect of which service tax is levied under the relevant section of the Finance Act, 1994 (Act 32 of 1994) as amended from time to time is given below:

(1)Section 65(48)(e): “To a client, by an advertising agency in relation to advertisements in any manner”. Corresponding Entry in List-II of the Constitution – Entry 55 – “Taxes on advertisements published in the newspapers [and advertisements broadcast by radio or television]”

(2)Section 65(48)(f) – “to a customer, by a courier agency in relation to door-to-door transportation of time-sensitive documents, goods or articles”. Corresponding Entry in List-II of the Constitution – Entry 56 – “Taxes on goods and passengers carried by road or on inland waterways”.

(3)Section 65(48)(m) – “to a client, by a mandap keeper in relation to the use of a mandap in any manner including the facilities provided to the client in relation to such use and also services, if any, rendered as a caterer”. Corresponding Entry in List-II of the Constitution – Entry 49 – “Taxes on lands and buildings”

(4)Section 65(48)(o) – “to any person, by a rent-a-cab scheme operator in relation to the renting of a cab” Corresponding Entry in List-II of the Constitution – Entry 57 – “Taxes on vehicles, whether mechanically propelled or not; suitable for use of roads, including tram-cars subject to the provisions of Entry 35 of List III.

(5)Section 65(48)(za) – “to any person, by a mechanized slaughter house in relation to the slaughtering of bovine animals.”

GST:
It is right phase for time bound and targeted GST reform will boost India’s growth and development. Introduction of Goods and Services Tax (GST) is the most important reform of indirect tax system in the country, made possible by Constitution (One Hundred and First Amendment) Act, 2016.

GST Council - Article 279A
The Union Cabinet under the Chairmanship of Prime Minister Shri NarendraModi has approved setting up of GST Council and setting up its Secretariat as per the following details:

The Cabinet also decided to provide for adequate funds for meeting the recurring and non-recurring expenses of the GST Council Secretariat, the entire cost for which shall be borne by the Central Government. The GST Council Secretariat shall be manned by officers taken on deputation from both the Central and State Governments.

The steps required in the direction of implementation of GST are being taken ahead of the schedule so far.

The Constitution (One Hundred and Twenty-second Amendment) Bill, 2016, for introduction of Goods and Services tax in the country was accorded assent by the President on 8th September, 2016, and the same has been notified as the Constitution (One Hundred and First Amendment) Act, 2016. As per Article 279A (1) of the amended Constitution, the GST Council has to be constituted by the President.