A federal Constitution establishes a dual polity with the Union at the Centre and the states at the periphery, each endowed with powers to be exercised in the field assigned to them. The legislative, executive and the financial authority is divided between the Centre and the units not by any law passed by the Centre but by the Constitution itself.

The Indian Constitution provides for a new kind of federalism to meet India’s peculiar needs. In the matter of distribution of powers, the framers followed the pattern of the Government of India Act, 1935. Centre- State relations have been classified as under-

1) Legislative relations     

2) Administrative Relations

3) Financial Relations.

1) Legislative relations    

The Constitution of India makes a two-fold distribution of legislative powers —

a) With respect to territorial jurisdiction, and

b) With respect to subject matter of legislation.

a) Territorial jurisdiction

As regards the territorial jurisdiction, Article 245(1) provides: “Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a state may make laws for the whole or any part of the State.” 

Clause (2) of Article 245 further provides: “No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.”

Article 31(A) provides that the state legislature can take over private property for public purpose. Any state bill that provides for this should be reserved for the consideration of the President.

Article 31(B) created the Ninth Schedule to the Constitution and the state legislature's decision can be placed under the Ninth Schedule only when it is approved by the Parliament.

According to Article 200, after the passage of a Bill in the state legislature, it is presented to the governor. The governor can give his assent. He can declare it as ‘withheld’ or he can send an ordinary Bill for the reconsideration of the legislature or he can reserve the Bill for the reconsideration of the President.

Article 288 (2) authorizes the state legislature to levy tax on a Central Authority situated in the state for the storage of water or electricity generated, consumed, distributed or sold. However, such Bills shall be reserved for the consideration of the President.

Art 304 (b) authorizes the state legislature to impose reasonable restrictions on inter-state trade or commerce. However, any such bill can be introduced in the legislature only on the recommendation of the President.

b) Distribution of subject-matter of legislation

Article 246 provides that the Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule and the state legislature may make laws with respect to the matters contained in the State list. As regards the matters contained in the concurrent list, both the Union and the states can make laws.

Article 246(4) holds that the Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State notwithstanding that such matter is a matter enumerated in the State List.

Residuary powers of legislation

According to Article 248 (1) Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List. According to Clause (2) of Article 248 such power shall include the power of making any law imposing a tax not mentioned in either of those Lists.

The Parliament has exclusive legislative jurisdiction over the subject mentioned in the Union List and the state legislature ordinarily enjoys jurisdiction over the state list but under some special conditions the Parliament can legislate over the state list. These conditions are being discussed below:

First condition

Under Article 249 the Rajya Sabha may pass a resolution where it can authorize the Parliament to legislate on one or more subjects mentioned in the state list on the grounds of national interest but this law will not be valid for more than one year. But the Rajya Sabha by passing the same resolution again can extend it for another one year. It may be renewed as many times necessary but not exceeding a year at a time.

Such a resolution has to be passed by the Rajya Sabha by a special majority of not less than 2/3 of the members present and voting and the absolute majority of the House.

Second condition

Under Article 250 during the proclamation of National emergency the Parliament assumes concurrent legislative jurisdiction over each & every subject of the state list. The State list is converted into Concurrent list. Such a law, however, shall cease to have effect on the expiry of six months after the resolution has ceased to operate.

Third condition

Under Article 252 the Parliament has the power to legislate for two or more States by consent and consent of such legislation by any other State. The Article makes it possible for the parliament to make such laws relating to state subjects as regards such States whose legislatures empower the Parliament on this behalf by resolutions.

Fourth condition

Article 253 empowers the Parliament to make any law for the whole or any part of the territory of India for implementing treaties and international treaties and agreements.

Fifth condition

Under Article 356 during President’s rule, the state government is dismissed, the state legislature is either suspended or dissolved and the legislative power of the state legislature could be entrusted to the Parliament by the President.

Administrative relations

According to Article 256, the executive power of every state shall be so exercised as to ensure compliance with the laws made by Parliament and any existing laws which apply in that state, and the executive power of the Union shall extend to the giving of such directions to a state as may appear to the government of India to be necessary for that purpose.

According to Article 257(1), the executive power of every state shall be so exercised as not to impede or prejudice the exercise of the executive power of the Union, and the executive power of the Union shall extend to the giving of such directions to a state as may appear to the government of India to be necessary for that purpose.

Clause (2) of Article 257 states that the executive power of the Union shall also extend to the giving of directions to a state as to the construction and maintenance of means of communication declared in the direction to be of national or military importance.

Clause (3) of Article 257 states that the executive power of the Union shall also extend to the giving of directions to a State as to the measures to be taken for the protection of the railways within the State.

According to Article 261(1), full faith and credit shall be given throughout the territory of India to public acts, records and judicial proceedings of the Union and of every State.

According to Article 261 (2), the manner in which and the conditions under which the acts, records and proceedings referred to in clause (1) shall be proved and the effect thereof determined shall be as provided by law made by Parliament.

According to Article 261 (3), final judgments or orders delivered or passed by civil courts in any part of the territory of India shall be capable of execution anywhere within that territory according to law.

Disputes relating to waters

Article 262 deals with adjudication of disputes relating to waters of inter-state rivers or river valleys. According to Article 262 (1), Parliament may by law provide for the adjudication of any dispute or complaint with respect to the use, distribution or control of the waters of, or in, any inter-state river or river valley.

Coordination between states

Article 263 consists of the provisions with respect to an inter-state council. It states that if at any time it appears to the President that the public interests would be served by the establishment of a Council charged with the duty of —

(a) inquiring into and advising upon disputes which may have arisen between states.

(b) investigating and discussing subjects in which some or all of the states, or the Union and one or more of the states, have a common interest.

(c) making recommendations upon any such subject and, in particular, recommendations for the better coordination of policy and action with respect to that subject, it shall be lawful for the President by order to establish such a Council, and to define the nature of the duties to be performed by it and its organization and procedure.

Financial relations

Distribution of revenues between the Union and the states

Article 268. Duties levied by the Union but collected and appropriated by the States.

(1) Such stamp duties and such duties of excise on medicinal and toilet preparations as are mentioned in the Union List shall be levied by the Government of India but shall be collected —

(a) in the case where such duties are leviable within any Union territory, by the Government of India, and

(b) in other cases, by the states within which such duties are respectively leviable.

(2) The proceeds in any financial year of any such duty leviable within any state shall not form part of the Consolidated Fund of India, but shall be assigned to that state. Article 269. Taxes levied and collected by the Union but assigned to the states —

(1) Taxes on the sale or purchase of goods and taxes on the consignment of goods shall be levied and collected by the government of India but shall be assigned and shall be deemed to have been assigned to the states on or after the 1st day of April, 1996 in the manner provided in clause (2).

Explanation: For the purposes of this clause, (a) the expression “taxes on the sale or purchase of goods” shall mean taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-state trade or commerce.

(b) the expression “taxes on the consignment of goods” shall mean taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-state trade or commerce.

(2) The net proceeds in any financial year of any such tax, except in so far as those proceeds represent proceeds attributable to Union territories, shall not form part of the Consolidated Fund of India, but shall be assigned to the states within which that tax is leviable in that year, and shall be distributed among those states in accordance with such principles of distribution as may be formulated by Parliament by law.

(3) Parliament may by law formulate principles for determining when a sale or purchase of, or consignment of, goods takes place in the course of inter-state trade or commerce. 

Article 270. Taxes levied and distributed between the Union and the states—

(1) All taxes and duties referred to in the Union List, except the duties and taxes referred to in articles 268 and 269, respectively, surcharge on taxes and duties referred to in article 271 and any cess levied for specific purposes under any law made by Parliament shall be levied and collected by the Government of India and shall be distributed between the Union and the States in the manner provided in clause (2).

(2) Such percentage, as may be prescribed, of the net proceeds of any such tax or duty in any financial year shall not form part of the Consolidated Fund of India, but shall be assigned to the States within which that tax or duty is leviable in that year, and shall be distributed among those States in such manner and from such time as may be prescribed in the manner provided in clause (3).

(3) In this Article, “prescribed” means, —

(i) until a Finance Commission has been constituted, prescribed by the President by order, and

(ii) after a Finance Commission has been constituted, prescribed by the President by order after considering the recommendations of the Finance Commission.

Article 271. Surcharge on certain duties and taxes for purposes of the Union.— Notwithstanding anything in Articles 269 and 270, Parliament may at any time increase any of the duties or taxes referred to in those articles by a surcharge for purposes of the Union and the whole proceeds of any such surcharge shall form part of the Consolidated Fund of India.

101st Constitutional Amendment Act: Goods and Services Tax

There are several articles in the Constitution of India which define the financial relations between Union and States. Since GST bills involve a huge interest of the state governments, such a historical tax reform cannot take place without making suitable changes into the Constitution. For this purpose, the 101st amendment of the Constitution was passed. The important changes made in Constitution (new Articles / amended Articles) via this law are as follows:

Article 246 (A)

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

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

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

Notable Points from Article 246A

·       Both Union and States in India now have “concurrent powers” to make law with respect to goods & services

·       The intra-state trade now comes under the jurisdiction of both centre and state; while inter-state trade and commerce is “exclusively” under central government jurisdiction.

Article 269A

This is a new Article which reads as follows:

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

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

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

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

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

(5) Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.’

Notable Points from Article 269A

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

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

Article 279-A:

This Article provides for 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 council will be empowered to take decisions on the following:

·       The taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax;

·       The goods and services that may be subjected to, or exempted from, the goods and services tax;

·       Model Goods and Services Tax Laws, principles of levy, apportionment of Integrated Goods and Services Tax and the principles that govern the place of supply;

·       The threshold limit of turnover below which goods and services may be exempted from goods and services tax;

·       The rates including floor rates with bands of goods and services tax;

·       Any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster;

·       Special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and Any other matter relating to the goods and services tax, as the Council may decide.

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

Changes in the 7th Schedule

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

Union List:

·       The entry 84 of Union List earlier comprised the duties on tobacco, alcoholic liquors, opium, Indian hemp, narcotic drugs and narcotics, medical and toilet preparations. After this amendment, it will comprise Petroleum crude, high speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel, tobacco and tobacco products. Thus, these are now out of ambit of GST and subject to Union jurisdiction.

·       Entry 92 (newspapers and on advertisements published therein) has been deleted thus, they are now under GST.

·       Entry 92-C (Service Tax) has now been deleted from the Union list.

State List

·       Under State list, entry 52 (entry tax for sale in state) has been deleted.

·       In Entry 54, Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92-A of List I.; has been now replaced by Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods.”

·       Entry 55 (advertisement taxes) have been deleted.

·       Entry 62 (Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling) has been replaced by these taxes only to be levied by local governments (panchayats, municipality, regional council or district council.

Other Important amendments in existing Articles

·       The residuary power of legislation of Parliament under Article 248 is now subject to Article 246A.

·       Article 249 has been changed so that if 2/3rd majority resolution is passed by Rajya Sabha, the Parliament will have powers to make necessary laws with respect to GST in national interest.

·       Article 250 has been amended so that Parliament will have powers to make laws related to GST during emergency period.

·       Article 268 has been amended so that excise duty on medicinal and toilet preparation will be omitted from the state list and will be subsumed in GST.

·       Article 268A has been repealed so now service tax is subsumed in GST.

·       Article 269 would empower the parliament to make GST related laws for inter-state trade / commerce.

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