30 Facts about Central-State Financial Relations in India

Here are 30 important and potentially confusing facts about Central-State Financial Relations in India, which can help in your UPSC CSE preparation:

1. Central-State Financial Relations refer to the distribution of financial powers and resources between the Central Government and State Governments in India, as outlined in the Constitution.
2. Article 245 to Article 283 of the Indian Constitution deal with financial relations between the Centre and States, laying down the principles of tax distribution, revenue sharing, and fiscal management.
3. The Finance Commission plays a crucial role in recommending the distribution of financial resources between the Union Government and the States. It is established under Article 280 of the Constitution.
4. The Union List, State List, and Concurrent List under Schedule VII of the Constitution define the areas of jurisdiction for both the Centre and States. Financial relations are influenced by the division of these subjects between the Centre and the States.
5. Central Taxes include Income Tax, Customs Duty, Excise Duty, GST, and Corporation Tax, while State Taxes include Sales Tax, State Excise Duty, Stamp Duty, and Land Revenue.
6. GST (Goods and Services Tax), introduced in 2017, marked a significant shift in the financial relations between the Centre and States, as it established a dual system of taxation, with both the Centre and States sharing the tax base.
7. The Finance Commission’s role is to recommend the distribution of net proceeds of taxes between the Centre and States, and also suggest principles governing grants-in-aid to States.
8. Revenue Sharing is a key component of Central-State financial relations. A portion of the Central taxes is transferred to the States according to the recommendations of the Finance Commission.
9. Article 265 of the Constitution mandates that no tax shall be levied or collected except by authority of law. This applies to both the Centre and the States.
10. Grants-in-aid are financial transfers from the Centre to the States to assist in the implementation of various schemes, particularly for States that have fiscal deficits or inadequate resources.
11. The Central Government has the power to levy taxes on goods and services, while the State Governments primarily levy taxes on goods, services, and land within their respective territories.
12. The Goods and Services Tax (GST) Council, formed under Article 279A, is a joint forum for the Union and States to recommend tax rates and the structure of GST, thereby affecting the Centre-State financial balance.
13. Non-Plan Grants are given by the Centre to States to cover specific fiscal gaps. They are typically provided to States facing financial constraints or to implement special schemes.
14. Plan Grants are provided to States to support development and plan expenditure. The allocation of these funds is based on criteria like population, backwardness, and area.
15. The Niti Aayog has replaced the Planning Commission. It is tasked with promoting cooperative federalism and ensuring that both the Union and States collaborate on national development plans.
16. Fiscal Deficit refers to the excess of the Centre’s expenditure over its revenue (excluding borrowings). The FRBM (Fiscal Responsibility and Budget Management) Act, 2003 aims to control fiscal deficits at both the Centre and State levels.
17. The Special Status granted to certain States, such as Jammu & Kashmir (Article 370) or Nagaland, provides for financial autonomy in terms of tax and fiscal management.
18. Article 275 allows the Centre to make grants-in-aid to States that require financial assistance to address special needs, especially for backward or less developed regions.
19. The Planning Commission, before its dissolution, played an important role in formulating development policies and deciding the allocation of financial resources between the Centre and States for national plans.
20. The States’ share of central taxes has been increasing over time, particularly after the 14th Finance Commission recommended a higher share (42%) for States from the divisible pool of central taxes.
21. The Central Pool of Resources is the collection of taxes, grants, and borrowings of the Central Government, which are allocated to the States through mechanisms like the Finance Commission, Planning Commission, and other fiscal policies.
22. Borrowing Powers of the Centre and States differ. The Centre borrows through mechanisms like Government bonds while States borrow through state-level agencies like the State Development Loans (SDLs).
23. Loans and Advances from the Centre to States are typically provided for specific projects or purposes and are subject to repayment terms. These loans have lower interest rates and longer repayment periods compared to market borrowings.
24. The 15th Finance Commission (2019-2024) further altered the balance between the Centre and States by recommending the creation of a fund for disaster response and improving the financial autonomy of local governments.
25. Surcharges and Cesses levied by the Centre are not shared with States. These are additional taxes on the existing tax base, and they go directly to the Centre’s coffers.
26. The Goods and Services Tax Act, 2017, replaced various indirect taxes such as Service Tax, Sales Tax, and Excise Duty and established a single market by allowing the Centre and States to jointly tax goods and services.
27. The Cash Transfer System (Direct Benefit Transfer) has been a reform aimed at directly transferring subsidies and welfare payments to the beneficiaries, reducing leakages in the public distribution system.
28. Article 293 of the Constitution allows States to borrow from the market but mandates that borrowing should not exceed the limit set by the Central Government, thus maintaining fiscal discipline.
29. The National Finance Corporation was set up to ensure that States receive adequate financing for infrastructure development and to improve the inter-governmental fiscal relations by providing financial support to states for specific development projects.
30. The Inter-State Council (under Article 263) facilitates coordination between the Union and States in matters of financial distribution, ensuring smooth fiscal relations and resolving disputes between States and the Centre.

Understanding the Central-State Financial Relations is crucial for the UPSC CSE exam, particularly in areas related to Indian polity, economics, governance, and public administration. The relationship between the Centre and States impacts various aspects of policy, economic development, fiscal management, and governance.