11. Centre-State Relations

The Centre-state relations can be studied under three heads

  • Legislative relations.
  • Administrative relations.
  • Financial relations

Legislative Relations

  • Articles 245 to 255 in Part XI of the Constitution deal with the legislative  relations  between  the Centre and the states.
  • Like any other Federal Constitution, the Indian Constitution also divides the  legislative  powers  between the Centre and the states with respect to both the territory and the subjects of legislation.
  • Further, the Constitution provides for the parliamentary legislation in the state field under five extraordinary situations as well as the centre‘s control over state legislation in certain cases.
  • Thus, there are four aspects in the Centre–states legislative relations, viz.,
    • Territorial extent of Central and state legislation;
    • Distribution of legislative subjects;
    • Parliamentary legislation in the state field;and
    • Centre‘s control over state legislation.

1.    Territorial Extent of Central and State Legislation

The Constitution defines the territorial limits of the legislative powers vested in  the Centre and  the states in  the following way:

  • The Parliament can make laws for the whole or any part of the territory of India. The  territory of India includes the states, the union territories, and any other area for the time being included in the territory of India.
  • A state legislature can make laws for the whole or any part of the state. The laws made by a state legislature are not applicable outside the  state,  except  when there  is  a  sufficient  nexus between the state and the object.
  • The Parliament alone can make ?extra-territorial legislation‘. Thus, the laws of the Parliament are also applicable to the Indian citizens and their property in any part of theworld.

However, the Constitution places certain restrictions on the plenary territorial jurisdiction of the Parliament. In other words, the laws of Parliament are not applicable in the following areas:

  • The President can make regulations for the peace,  progress  and  good   government  of  the  four Union Territories—the Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli and Daman and Diu. A regulation so made has the same  force  and  effect  as  an act  of Parliament. It  may also repeal or amend any act of Parliament in relation to these union territories.
  • The governor is empowered to direct  that an act of Parliament does not apply to a  scheduled area  in the state or apply with specified modifications and exceptions.
  • The Governor of Assam may likewise direct that an act of Parliament does  not apply to  a tribal  area (autonomours district) in the state or apply with specified modifications and exceptions. The President enjoys the same power with respect to tribal areas (autonomous districts) in Meghalaya, Tripura and Mizoram.

2.    Distribution of Legislative Subjects

The Constitution provides for a three-fold distribution of legislative subjects between the Centre and  the states, viz., List-I (the Union List), List-II (the State List) and List-III (the Concurrent List) in the Seventh Schedule:

  • The Parliament has exclusive powers to make laws with respect to any of the matters enumerated in the Union List. This list has at present 100 subjects (originally 97 subjects) like defence, banking, foreign affairs, currency, atomic energy, insurance, communication, inter-state trade and commerce, census, audit and so on.
  • The state legislature has ?in normal circumstances? exclusive powers to make laws  with respect to any of the matters enumerated in the State List. This has at present 61 subjects (originally 66 subjects) like public order, police, public health and sanitation, agriculture, prisons, local government, fisheries, markets, theaters, gambling and so on.

Both, the Parliament and state legislature can make laws with respect to any of the matters  enumerated in the Concurrent List. This list has at present 52 subjects (originally 47subjects) like criminal law and procedure, civil procedure, marriage and divorce, population control and family planning, electricity, labour welfare, economic and social planning, drugs, newspapers, books and printing press, and others. The 42nd Amendment Act of 1976 transferred five subjects to Concurrent List from State List, that is,

(a) education,
(b) forests,
(c) weights and measures,
(d) protection of wild animals and birds, and
(e) administration of justice; constitution and organisation of all courts except the Supreme Court and the high courts.

  • The power to make laws with respect to residuary subjects (i.e., the matters which are  not enumerated  in any of the three lists) is vested in the Parliament. This residuary power  of  legislation includes the  power to levy residuary taxes.
  • From the above scheme, it is clear that the matters of national importance and  the  matters  which requires uniformity of legislation nationwide are included in the Union List.
  • The matters of regional and local importance and the matters which permits diversity of interest are specified in the State List.
  • The matters on which uniformity of legislation throughout the country is desirable but not essential are enumerated in the concurrent list. Thus, it permits diversity along with uniformity.
  • The Government of India (GoI) Act of 1935 provided for a three-fold enumeration, viz., federal, provincial and concurrent.
  • The present Constitution follows the scheme of this act but with one difference, that is, under this  act, the residuary powers were given neither to the federal legislature nor to the provincial legislature but to the governor-general of India. In this respect, India follows the Canadian precedent.
  • The Constitution expressly secure the predominance of the Union List over the State List and the Concurrent List and that of the Concurrent List over the State List.
  • Thus, in case of overlapping between the Union List and the State List, the former should prevail.  In  case of overlapping between the Union List and the Concurrent List, it is again the former  which should prevail.
  • Where there is a conflict between the Concurrent List and the State List, it is the former that should prevail.
  • In case of a conflict between the Central law and the state law on a subject enumerated  in  the Concurrent List, the Central law prevails over the state law.
  • But, there is an exception. If the state law has been reserved for the consideration of the president and has received his assent, then the state law prevails in that state.
  • But, it would still be competent for the Parliament to  override  such a law by subsequently making a law on the same matter.

3.    Parliamentary Legislation in the State Field

  • The above scheme of distribution of legislative powers between the Centre and the states is to be maintained in normal times.
  • But, in abnormal times, the scheme of distribution is either modified or suspended.
  • The Constitution empowers the Parliament to make laws on any matter enumerated in  the State List  under  the following five extraordinary circumstances:

When Rajya Sabha Passes a Resolution

  • If the Rajya Sabha declares that it is necessary in the national interest that Parliament should make laws on a matter in the State List, then the Parliament becomes competent to make laws on that matter. Such a resolution must be supported by two-thirds of the members present and voting.
  • The resolution remains in force for one year; it can be renewed any number of times but not exceeding one year at a time.
  • The laws cease to have effect on the expiration of six months after the resolution has ceased to be in force.
  • 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.

During a National Emergency

  • The  Parliament  acquires  the  power  to  legislate  with respect to matters in the State List, while a proclamation of national emergency is in operation.
  • The laws become inoperative on the expiration of six months after the 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 toprevail.

When States Make a Request

  • When the legislatures of two or more states pass resolutions requesting the Parliament to enact laws on  a matter in the State List, then the Parliament can make laws for regulating that matter.
  • A law so enacted applies only to those states which have passed theresolutions.
  • However, any other state may adopt it afterwards by passing a resolution to that effect in its  legislature.
  • 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 to 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.
  • Some examples of laws passed under the above provision  are Prize  Competition  Act, 1955;  Wild  Life (Protection) Act, 1972; Water (Prevention and Control of Pollution) Act, 1974; Urban Land  (Ceiling and Regulation) Act, 1976; and Transplantation of Human Organs Act,1994.

To Implement International Agreements

  • The Parliament can make laws on any matter in the State List for implementing the international treaties, agreements or conventions.
  • This provision enables the Central government to fulfill its international obligations and commitments.
  • Some examples of laws enacted under the above provision are United Nations (Privileges and Immunities) Act, 1947; Geneva Convention Act, 1960; Anti-Hijacking Act, 1982 and  legislations relating  to environment and TRIPS.

During President’s Rule

  • When the President‘s rule is imposed in a state, the Parliament becomes empowered to make  laws  with respect to any matter in the State List in relation to that state.
  • 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.
  • But, such a law can be repealed or altered or re-enacted by the state legislature.
  • Centre‘s Control Over State Legislation Besides the Parliament‘s power to legislate directly on  the  state subjects under the exceptional situations, the Constitution empowers the Centre to exercise  control over the state‘s legislative matters in the following ways:
  • The governor can reserve certain types of bills passed by the state legislature for the consideration  of the President. The president enjoys absolute veto over them.
  • Bills on certain matters enumerated in the State List can be introduced in the state legislature only with the previous sanction of the president. (For example, the bills imposing restrictions on the freedom of trade andcommerce).
  • The President can direct the states to reserve money bills and other  financial  bills  passed  by the state legislature for his consideration during a financial emergency.

Administrative Relations

  • Articles 256 to 263 in Part XI of the Constitution deal with the administrative relations between the Centre and the states. In addition, there are various other articles pertaining to the same matter.

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 few cases.
  • Thus, the executive power of the Centre extends to the whole of India:
  • to the matters on which the Parliament has exclusive power of legislation (i.e., the subjects enumerated in the Union List);
  • to the exercise of rights, authority and jurisdiction conferred on it by any treaty or agreement. Similarly, the executive power of a 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).

Obligation of States and the Centre

  • The Constitution has placed two restrictions on the executive power of the states in order to  give  ample scope to the Centre for exercising its executive power in an unrestricted manner.
  • Thus, the executive power of every state is to be exercised in such a way
  • as to ensure compliance with the laws  made by the Parliament and any existing law  which apply in  the state;
  • as not to impede or prejudice the exercise of executive power of the Centre in the state. While the former lays down a general obligation upon the state, the latter imposes a specific obligation on the state not to hamper the executive power of the Centre.
  • Article 365 says that where any state has failed to comply with (or to give effect to) any directions given by the Centre, it will be lawful for the President to hold that a situation has arisen in which the government of the state cannot be carried on in accordance with the provisions of the Constitution.
  • It means that, in such a situation, the President‘s rule can be imposed in the state under Article 356.

 Centre’s Directions to the States

In addition to the above two cases, 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;
  • the drawing up and execution of the specified schemes for the welfare of the Scheduled Tribes in the state.
  • The coercive sanction behind the Central directions under Article 365 (mentioned above) is also applicable in these cases.

Mutual Delegation of Functions

  • The distribution of legislative powers between the Centre and the states is rigid. Consequently, the Centre cannot delegate its legislative powers to the states and a single state cannot request the Parliament to make a law on a state subject.
  • The  distribution of executive  power  in general  follows the  distribution of legislative powers.
  • But, such a rigid division in the executive sphere may lead to occasional conflicts between the two.
  • Hence, the Constitution provides for inter-government delegation of executive functions in order to mitigate rigidity and avoid a situation of deadlock.
  • The Constitution also  makes a provision  for the entrustment of the executive functions of the Centre  to  a state without the consent of that state.
  • But, in this case, the delegation is by the Parliament and not by the president.
  • Thus, a law made by the Parliament on a subject of the Union List can confer powers and  impose  duties on a state, or authorise the conferring of  powers  and  imposition  of  duties  by  the  Centre  upon a state (irrespective of the consent of the state concerned).
  • Notably, the same thing cannot be done by the state legislature.
  • the mutual delegation of functions between the Centre and the state can take place either under an agreement or by a legislation. While the Centre can use both the methods, a state can use only the first method.

Cooperation between the Centre and States

The Constitution contains the following provisions to secure cooperation and  coordination  between  the Centre and the states:

  • The Parliament can provide for the adjudication of any dispute or complaint with respect to the use, distribution and control of waters of any inter-state river and river valley.
  • The President can establish (under Article 263) an Inter-State Council to investigate and discuss subject of common interest between the Centre and the states. Such a council was set up in 1990.7
  • Full faith and credit is to be given throughout the territory of India to public acts, records  and  judicial proceedings of the Centre and every state.
  • The Parliament can appoint an appropriate authority to carry out the purposes of the constitutional provisions relating to the interstate freedom of trade, commerce and intercourse. But, no such authority has been  appointed so far.

All India Services

  • Article 312 of the Constitution authorizes the Parliament to create new All-India Services on the basis of a Rajya Sabha resolution to that effect.
  • Though the all-India services violate the principle of federalism under the Constitution by restricting  the autonomy and patronage of the states, they are supported on the ground that

    (i) they help in maintaining high standard of administration in the Centre as well as in the states; 

    (ii) they help to  ensure uniformity of the administrative system throughout the country;

    (iii) they facilitate liaison, cooperation, coordination and joint action on the issues of common interest between the Centre and the states.

Financial Relations

  • Articles 268 to 293 in Part XII of the Constitution deal with Centre–state financial relations.
  • Besides these, there are other provisions dealing with the same subject.

Allocation of Taxing Powers

The Constitution divides the taxing powers between the Centre and the states in the following way:

  • The Parliament has exclusive power to levy taxes on subjects enumerated in the Union List (which are 15 in number).
  • The state legislature has exclusive power to levy taxes on subjects enumerated in the State List (which are 20 in number).
  • Both the Parliament and the state legislature can levy taxes on subjects enumerated in the Concurrent List (which are 3 in number).
  • The residuary power of taxation (that is, the power to impose 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.
  • The Constitution also draws a distinction between the power to levy and collect a tax and the power to appropriate the proceeds of the tax so levied and collected. For example, the income-tax is levied  and collected by the Centre but its proceeds are distributed between the Centre and the states.

Further, the Constitution has placed the following restrictions on the taxing powers of the states:

  • A state legislature can impose taxes on professions, trades, callings and employments. But, the total amount of such taxes payable by any person should not exceed Rs. 2,500 perannum.
  • A state legislature can impose taxes on the sale or purchase of goods (other than newspapers). But, this power of the states to impose sales tax is subjected to the four restrictions:

    (a) no tax can be imposed on the sale or purchase taking place outside the states;

    (b) no tax can be imposed on  the  sale or purchase taking place in the course of import or export;

    (c) no tax  can be imposed on  the  sale or purchase taking place in the course of inter-state trade and commerce;

    (d) a tax imposed on the sale or purchase of goods declared by Parliament to be of special importance in inter-state trade and commerce is subject to the restrictions and conditions specified by the Parliament.
  • A state legislature can impose tax on the consumption or sale of electricity. But, no tax can be imposed on the consumption or sale of electricity which is

    (a) consumed by the Centre or sold to the Centre;

    (b) consumed in the construction, maintenance or operation of  any railway  by the Centre or by the concerned railway company or sold to the Centre or the railway company for the same purpose.
  • A state legislature can impose a tax in respect of any water or electricity stored, generated, consumed, distributed or sold by any authority established by Parliament for regulating  or developing any inter-state river or river valley. But, such a law, to be effective, should be reserved for the president‘s consideration and receive his assent.

Distribution of Tax Revenues

  • The 80th Amendment of 2000 and the 88th Amendment of 2003  have  introduced  major  changes  in  the scheme of the distribution of tax revenues between the centre and the states.
  • The 80th Amendment was enacted to give effect  to the recommendations of the 10th Finance Commission.
  • The Commission recommended that out of the total income obtained from certain central taxes and duties, 29% should go to the states. This is known as the ?Alternative Scheme of Devolution‘ and  came into effect retrospectively from April 1, 1996.
  • This amendment has brought several central taxes and duties like Corporation Tax and Customs Duties  at par with Income Tax (taxes on income other than agricultural income) as far as their constitutionally mandated sharing with the states is concerned.
  • The 88th Amendment has added a new Article 268-A dealing with service tax.
  • It also added a new subject in the Union List – entry 92-C (taxes on services).
  • Service tax is levied by the centre but collected and appropriated by both the centre and the states.

A. Taxes Levied by the Centre but Collected and Appropriated by the States (Article 268)

  • Stamp duties on bills of exchange, cheques, promissory notes, policies of insurance, transfer of shares and others.
  • Excise duties on medicinal and toilet preparations containing alcohol and narcotics.
  • The proceeds of these duties  levied  within any state  do  not form a  part of the  Consolidated  Fund of India, but are assigned to that state.

B.  Service Tax Levied by the Centre but Collected and Appropriated by the Centre and the States (Article 268-A):

  • Taxes on services are levied by the Centre. But, their proceeds are collected as well as appropriated by both the Centre and the states.
  • The principles of their collection and appropriation are formulated by the Parliament.

C. Taxes Levied and Collected by the Centre but Assigned to the States (Article 269)

  • Taxes on the sale or purchase of goods (other than newspapers) in the course of inter-state trade or commerce.
  • Taxes on the consignment of goods in the course of inter-state trade or commerce.
  • The net proceeds of these taxes do not form a part of the Consolidated Fund of India. They  are assigned to  the concerned states in accordance with the principles laid down by the Parliament.

    Taxes Levied and Collected by the Centre but Distributed between the Centre and the States (Article 270): This category includes all taxes and duties referred to in the Union List except the following:
  • Duties and taxes referred to in Articles 268, 268-A and 269 (mentioned  above);
  • Surcharge on taxes and duties referred to in Article 271 (mentioned below);
  • Any cess levied for specific purposes.
  • The manner of distribution of the net proceeds of these taxes and duties is prescribed by the President on the recommendation of the Finance Commission.

E. Surcharge on Certain Taxes and Duties for Purposes of the Centre (Article 271):

  • The Parliament can at any time levy the surcharges on taxes and duties referred to in Articles 269 and 270 (mentioned above).
  • The proceeds of such surcharges go to the Centre exclusively.
  • In other words, the states have no share in these surcharges.

F. Taxes Levied and Collected and Retained by the States

  • These are the taxes belonging to the states exclusively.
  • They are enumerated in the state list and are 20 in number.
  • These are :

    (i) land revenue;

    (ii) taxes on agricultural income, succession and estate duties in respect of agricultural land;

    (iii) taxes on lands and buildings, on mineral rights, on animals and boats, on road vehicles, on luxuries, on entertainments, and on gambling;

    (iv) excise duties on alcoholic liquors for human consumption and narcotics;

    (v) taxes on the entry of goods into a local area, on advertisements (except newspapers), on consumption or sale of electricity, and on goods and passengers carried by road or on inland waterways;
    (vi) taxes on professions, trades, callings and employments
    not exceeding Rs. 2,500 per annum;

    (vii) capitation taxes;

    (viii) tolls;

    (ix) stamp duty on documents (except those specified in the Union List);

    (x) sales tax (other than newspaper);

    (xi) fees on the matters enumerated in the State List (except court fees).

Distribution of Non-tax Revenues

  1. The Centre The receipts from the following form the major sources of non-tax revenues of the Centre:

(i) posts and telegraphs;
(ii) railways;
(iii) banking;
(iv) broadcasting
(v) coinage and currency;
(vi) central public sector enterprises; and
(vii) escheat and lapse.

  • The States The receipts from the following form the major sources of non-tax revenues of the states:

    (i) irrigation;
    (ii) forests;
    (iii) fisheries;
    (iv) state public sector enterprise; and
    (v) escheat and lapse.

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.
  • Also, different sums may be fixed for different states.
  • 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 on the recommendations of the Planning Commission—an extra-constitutional body.
  • These  grants are  also  known as  discretionary  grants, the reason  being  that the center is  under  no obligation to give these grants and the matter lies within its discretion.
  • These grants have a two-fold purpose: to help the state financially to fulfill  plan targets; and to give  some leverage to the center to influence and coordinate state action to effectuate the national plan.
  • Notably, the discretionary grants form the larger part of the Central grants to the states (when compared with that of the statutory grants).
  • Hence, the Planning Commission has assumed greater significance than the Finance Commission in center state financial relations.

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 and were made to the states on the recommendation of the Finance Commission.

Protection of the States’ Interest

To protect the interest of states in the financial matters, the Constitution lays down that the following bills can be introduced in the Parliament only on the recommendation of thePresident:

  • A bill which imposes or varies any tax or duty in which states are interested;
  • A bill which varies the meaning of the expression ?agricultural income‘ as defined for the purposes of the enactments relating to Indian income tax;
  • A bill which affects the principles on which moneys are or may be distributable to states;
  • A bill which imposes any surcharge on any specified tax or duty for the purpose of the Centre.
  • The expression ?tax or duty in which states are interested? means:

    (a) a tax or duty the whole or  part of the net proceeds whereof are assigned to any state;

    (b) a  tax  or  duty  by  reference  to  the  net  proceeds whereof sums are for the time being payable, out of the Consolidated Fund of India to any state.
  • The phrase ?net proceeds‘ means the proceeds of a tax or a duty minus the cost of collection.
  • The net proceeds of a tax or a duty in any area is  to  be  ascertained  and  certified  by  the  Comptroller and Auditor-General of India.
  • His certificate isfinal.

Borrowing by the Centre and the States

The Constitution makes the following provisions with regard to the borrowing powers of the Centre and the states:

  • 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 by  the  Parliament. So far, no such law has been enacted by 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 out-standing 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.

Inter-Governmental  Tax  Immunities

Exemption of Central Property from State Taxation

  • The property of 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 betaxable.
  • 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.

Effects of Emergencies

The Centre–state financial relations in normal times (described above) undergo changes during emergencies. These are as follows:

National Emergency

  • While the proclamation of national emergency (under Article 352) is in operation, the president can modify the constitutional distribution of revenues between the Centre and the states.
  • This means that the president can either reduce or  cancel  the  transfer  of finances  (both tax sharing and grants-in-aid) from the Centre to the states.
  • Such modification continues till the end of the financial year in which the  emergency  ceases  to operate.

Financial Emergency

  • While the proclamation of financial emergency (under Article 360) is  in  operation,  the Centre can give directions to the states:

    (i) to observe the specified canons of financial propriety; 

    (ii) to reduce  the salaries and allowances of all class of persons serving in the state (including the high courtjudges);

    (iii) to reserve all money bills and other financial bills for the consideration of the President.
  • Till 1967, the centre–state relations by and large were smooth due to one-party rule at the Centre and  in most of the states.
  • In 1967 elections, the Congress party was defeated in nine states and its position at the Centre became weak.
  • This changed political scenario heralded a new era in the Centre–state relations.
  • The non-Congress Governments in the states opposed the increasing centralisation and intervention of the Central government.
  • They raised the issue of state autonomy and demanded more powers and financial resources to the states.
  • This caused tensions and conflicts in Centre–state relations.

Administrative Reforms Commission

  • The Central government appointed a six-member  Administrative  Reforms  Commission  (ARC)  in 1966 under the chairmanship of Morarji Desai (followed by K Hanumant-hayya).
  • Its terms of references included, among others, the examination of Centre–State relations.
  • In order to examine thoroughly the various issues in Centre–state relations, the  ARC  constituted  a study team under M C Setalvad.
  • On the basis of the report of this study team, the ARC finalized its own report and submitted it to the Central government in 1969.
  • It made 22 recommendations for improving the Centre–state relations. The important recommendations are:
  • Establishment of an Inter-State Council under Article 263 of the Constitution.
  • Appointment of persons having long experience in public life and administration and non- partisan attitude as governors.
  • Delegation of powers to the maximum extent to thestates.
  • Transferring of more financial resources to the states to reduce their dependency upon the Centre. Deployment of Central armed forces in the states either on their request or otherwise. No action was taken by the Central government on the recommendations of the ARC.

Sarkaria Commission

  • In 1983, the Central government appointed a three-member Commission on  Centre–state  relations under the chairmanship of R S Sarkaria, a retired judge of the Supreme Court.
  • The commission was asked to examine and  review  the  working of  existing  arrangements  between the Centre and states in all spheres and recommend appropriate changes and measures.

The Commission   made   247 recommendations to improve Centre–state relations. The important recommendations are mentioned below:

  1. A permanent Inter-State Council called the Inter-Governmental Council should be set up  under  Article 263.
  • Article 356 (President‘s Rule) should be used very sparingly, in extreme cases  as  a  last  resort when all the available alternatives fail.
  • The institution of All-India Services should be further strengthened and some more such services should be created. The residuary powers of taxation should continue to remain with the Parliament, while the other residuary powers should be placed in the Concurrent List.
  • When the president withholds his assent to the state bills, the reasons should be communicated to the state government.
  • The National Development Council (NDC) should be renamed and reconstituted as the National Economic and Development Council (NEDC).
  • The zonal councils should be constituted afresh and reactivated to promote the spirit of federalism.
  • The Centre should have powers to deploy its armed forces, even without the consent of states. However, it is desirable that the states should be consulted.
  • The Centre should consult the states before making a law on a subject of the Concurrent List.
  • The procedure of consulting the chief minister in the appointment of the state governor should be prescribed in the Constitutionitself.
  • The net proceeds of the corporation tax may be made permissibly shareable with thestates.
  • The governor cannot dismiss the council of ministers so long as it commands a majority in the assembly.
  • The governor‘s term of five years in a state should not be disturbed except for some extremely compelling reasons.
  • No commission of enquiry should be set up against a  state  minister  unless  a  demand  is  made by the Parliament.
  • The surcharge on income tax should not be levied by the Centre except for a specific  purpose and  for a strictly limited period.
  • The present division of functions between the Finance Commission and the Planning Commission is reasonable and should continue.
  • Steps should be taken to uniformly implement the three language formula in its true spirit.
  • No autonomy for radio and television but decentralisation in theiroperations.
  • No change in the role of Rajya Sabha and Centre‘s power to reorganise the states.
  • The commissioner for linguistic minorities should be activated.
  • Till December 2011, the Central government has implemented 180 (out of 247)  recommendations  of  the Sarkaria Commission. The most important is the establishment of the Inter-State Council in 1990.

Punchhi Commission

  • The Second commission on Centre-State Relations was set-up by the Government of India in April  2007 under the Chairmanship of Madan Mohan Punchhi, former Chief Justice of India.
  • It was required to look into the issues of Centre-State relations keeping in view the sea-changes that have taken place in the polity and economy of India  since  the  Sarkaria  Commission had  last looked at the issue of Centre-State relations over two decades ago.
  • The Commission submitted its report to the government in April 2010. In finalising the 1,456 page report, in seven volumes, the Commission took extensive help from the Sarkaria Commission report, the National Commission to Review the Working of the Constitution (NCRWC) report and the Second Administrative Reforms Commission report.
  • However, in a number of areas, the Commission report differed from the Sarkaria Commission recommendations.
  • The Planning Commission has a crucial role in the current situation. But its role should be that of coordination rather that of micro managing sectoral plans of the Central ministries and  the  states.  Steps should be taken for the setting up of an Inter-State Trade and Commerce Commission under  Article 307 read with Entry 42 of List-I.This Commission should be vested with both advisory and executive roles with decision making powers.
  • As a Constitutional body, the decisions of the Commission should be final and binding on all states as well as the Union of India.
  • Any party aggrieved with the decision of the Commission may prefer an appeal to the Supreme Court.
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