Distribution of Revenue in the light of the Constitution of India: Taxation Provisions

This article was written by Anisha Jhawar a student of Institute of Law Nirma University.

Chapter 1: Introduction to Distribution of Revenues
Yet another feature of Indian Federalism could be very well reflected by the manner it lays down the provisions regarding Distribution of Revenues between the Centre and the States. Part XII of the Constitution of India deals with the Finance, Property, Contracts and Suits whereby the second Chapter specifically deals with the Distribution of revenues between both the governments. The provisions explicitly mention the powers as to who levies the tax, who collects it, and who uses it. While certain provisions are specific with respect to the taxation areas, other is an exception. Through this research paper, the researcher tries to establish the basics so as to understand the nuances of the distribution of power with special reference to revenues from tax.
Nature of the Provisions
The nature of these provisions is general and financial. This is so because all these provisions are associated with the levying, collection and appropriation of taxes. By tax, it is meant a compulsory constraint on the individuals’ income, profits earned, or a contribution added to the cost in goods and services or any transaction related whereof a certain amount has to be paid mandatorily.
Hence, it derives its financial character from the purpose for which it has been envisaged therein. Furthermore, these articles are to be considered as general in nature as there are certain specific enactments which prevail over these general provisions.
The subject matter of the taxation is to be derived from the Seventh Schedule wherein the powers have been distributed on the subject matters as per the Union List, State List and the concurrent List.
Fundamental Principles on basis of which these Articles are envisaged
A federal structure has one of its features as ‘Dual Polity’ which means that there are two political governments governing the nation; one is at the Centre and the other at the Provincial level. But ‘Dual Polity’ does not merely concern about the existence of two separate governments for the purpose of administration, but it also attracts one of the essential needs for Financial Resources. Both of them need resources to execute their functions. Thus, one must understand that these provisions are essentially required to maintain the Federal Structure.
Need for the Distribution of powers concerning revenue from tax

The problem of allocating the resources becomes difficult as there is single entity paying tax and both the governments need the funds. If both the governments were to impose tax as according to its own discretion, the citizens would have ended up paying tax twice in degree or in quantity. Also, not all and everything could be legislated by the Parliament alone upon the matters of tax. Had it been so, there might arise a situation when the Centre would have reserved all the resources up to itself. Thus, in order to have a just distribution of resources between the two and to simplify the chaos, the Constitution of India lays down a basis of distinction between the powers of the Central and the Provincial Governments.

Chapter 2: The Great Long Journey

To understand the jurisprudence behind the principle of such provisions, it is worthy to know the history and what our constitution makers had thought of before envisaging these provisions. Through this section, the researcher tries to resolve the statement of Problem.

History and Amendments
Although there have been many amendments to these provisions, yet below stated are the important ones which have sustained till date:

Amendment & Year Article No.

Sixth Amendment, 1956 Article 269

Seventh Amendment, 1956 Article 268

Forty-Sixth Amendment, 1982 Article 269

Eighty-eighth Amendment, 2000 Article 268-A, Article 269, Article 270

Views of Dr. B.R. Ambedkar

Dr. B. R. Ambedkar who was the chairman of Drafting Committee was of the opinion that the Draft Constitution so introduced had maintained the balance between a strong union and a federal governmental system. Due to contemporary conditions prevailing, it is quite difficult to resist the Union from becoming powerful. However, it is necessary to restrict few of its powers. This is because he feared India being prone to a monarchical rule due to a strong central government.

Dissenting Views
Others including K. Santhanam focused more on the subject matter being included in the concurrent list. He said that it is required to define the scope of both the governments and draw a clear distinction between both of their powers.
Another such member proposed to have a strong union along with proper functionaries of state. States are like the limbs of the Centre.
That is when after the debates of the Drafting Committee, we brought out the concept of Cooperative Federalism into our constitution wherein both governments sustain with the support of each other.

Chapter 3: Articles of the Constitution of India
The researcher in this section tries to explain the constitutional provisions related to the concerned topic wherein the researcher draws a clear distinction between the powers of Centre-State and the subject matter related thereof. Any queries related to each article would also be resolved as this section progresses.

Article 268
Nature
The article provides a mandate on the Government of India as is evident by “…shall be levied…Government of India…”. Thus it grants an exclusive power to the Union to levy stamp-duties and excise duty related to medicinal and toilet preparations.

Subject Matter
The Subject matter of this article concerns the charge on medicinal and toilet purposes which falls under the sole authority of the Centre to legislate. This is because this article explicitly mentions as, “…mentioned in the Union list…” To be more precise, Entry 84 of List I, Seventh Schedule takes note of the power to Union upon this subject. It states that duties of excise including medicinal and toilet preparations are a part of the inclusive powers of the Central government.

Roles of each Government with respect to Collection
While the Union levies the duties, it is the responsibility of the State Governments to collect wherein such duties are leviable and of the Government of India in case of Union territories.

Appropriation of Funds
Furthermore, the second clause is also a mandatory clause as it requires the proceeds of any such duty within that state in a financial year necessarily should not to be included in the consolidated fund of India. Rather, the fund so generated to assigned to that particular state itself. This is evident by “…shall not…part of …Consolidated Fund of India…shall be assigned…State”.

Article 268-A
Nature
The article provides a mandate on the Government of India as is evident by “…shall be levied…Government of India…” Thus it grants an exclusive power to the Union to levy service tax.

Subject Matter
The subject matter is related to the service tax which falls under the sole authority of the Centre to legislate. This power is covered under Entry 92-C of List I, Seventh Schedule wherein it is mentioned as ‘taxes on services’. Service tax basically refers to the constraint on services provided by the service providers, although the same is ultimately borne by service-users.

Roles of each Government with respect to Collection
Although, the Union imposes service tax, both governments at centre and state have powers to collect the same. An important keynote is that such collection of taxes is subjected to principles as laid down by Parliament.

Appropriation of Funds
Similar to the collection, both governments are authorised to appropriate the funds generated from such tax in a financial year, subjected to the principles and law formulated by Parliament.

Article 269
Nature
The article provides a mandate on the Government of India as is evident by “…shall…levied and collected…Government of India…” Thus it grants an exclusive power as well as responsibility on the Union related to taxes on purchase or sale of goods and consignment of goods.

Subject Matter
The subject matter is related to taxes on purchase or sale save newspapers which are sold and purchases as a part of inter-state trade or commerce. The taxation provision also extends to consignment of goods wherein any such consignment is to the person who makes it or any other as a part of the inter-state trade or commerce. Entries 92-A and 92-B of List I, Seventh Schedule states such powers of the Union.

Roles of each Government with respect to Collection
Union imposes the tax on purchase, sale or consignment of goods, but the state does not play any role in the collection mechanism. The collection of tax is also done by the Union itself.

Appropriation of Funds
Whatever net proceeds have been generated by the way of collection in a financial year has to be assigned to the State, except those attributable to the Union Territories, in which the tax was leviable in that year. An important keynote is that such assignment to the states is subjected to principles as laid down by Parliament. However, the parliament may make laws with regards tax for the inter-state trade or commerce.

Article 271
Nature
This article is an exception to the preceding two articles, namely, Article 269 and Article 270. It provides discretion to the Parliament to make laws in matter of surcharge.

Subject Matter
The subject matter of this article concerns surcharge. Surcharge is an additional charge over the cost of the goods or service.

Roles of each Government with respect to Collection
There is no involvement of the State Governments with respect to surcharges. These are imposed by the Union at its discretion, i.e., when there arises a requirement for the purposes of Union.

Appropriation of Funds
The whole proceeds of surcharge are to be appropriated by the Union only. The state neither possesses a right nor can it demand for such surcharges. An important keynote is that the surcharges form a part of the consolidated fund of India.

Article 270
Nature
The article grants an exclusive power as well as responsibility on the Union to tax in subject matters as provided in List I, Seventh Schedule save Article 268, 268-A, 269 and 271.

Subject Matter
The subject matter is related to the tax entries as mentioned in the Union List, i.e., from Entry 82 to 92-C except those four articles as mentioned previously.

Roles of each Government with respect to Collection
Union imposes the tax and duties, but the state does not play any role in the collection mechanism. The collection of tax is also done by the Union itself.

Appropriation of Funds
Whatever net proceeds have been generated by the way of collection in a financial year have to be appropriated by both the governments. The percentage of distribution of net proceeds is applicable to only those states wherein these tax provisions are applicable, and is subjected to recommendations made by the Finance Commission so set up by the President. However, the net proceeds do not form a part of the Consolidated Fund of India.

Chapter 4: Holistic Interpretation of Articles
Although it is necessary to understand all of these Articles in their own sense, yet they have to be read in totality from a holistic point of Interpretation. In India, it is the Judiciary who plays a role in the interpretation of the statute and other enactments as made by the legislature. In this section, the researcher tries to bring out the synthesized meaning of all these provisions from view point of various lenses.

By Hon’ble Supreme Court of India
The Supreme Court of India has rendered two famous judicial precedents under Article 270. One of them is Devinatha case wherein it has pronounced that although the income tax is to be levied and collected by the state, yet the States may prescribe for such contribution distinguished from income tax. Furthermore, the Corporation tax, levied and collected by the centre is not to be distributed among the states. This is because corporate tax is a super tax on such profits earned by the Companies and other Corporations.

In yet another case of Kanniyan , this Hon’ble court propounded that the income tax is a part of the Consolidated Fund of India, and thus, it cannot be distributed among the states and Union territories and to those which are administered by the Presidential Rule.

In totality, those taxes and duties which are levied and collected by the Government of India form a part of the consolidated fund of India while those collected by the state do not.
Scanning articles through lenses of Federalism

Articles 268, 2868-A, 269 and 270 depict the true essence of Cooperative Federalism wherein both the taxes and duties are appropriated by both the Central and the Provincial Government, irrespective of who collects it. Thus both of them are complementary to each other in their existence with regard to the matters of revenue distribution through taxes.
While on the other hand, Article 271 helps to retain a degree of strong Union even in Cooperative federal structure. This is also well evident from the levying authority in all the previously mentioned articles whereby the power rested solely with the Union.

Chapter 5: Critiquing
It might appear that these articles very well serve the purpose of Federalism and draw a clear distinction of powers and authorities with respect to levying of taxes, true! But there are flaws too with this Mechanism. The researcher in this section tries to express his critique regarding the Mechanism of Revenue Distribution through tax provisions.

Analyse its objectives
The objective of these provisions is to acquire financial resources by the way of taxation. Such taxation provisions are laid down by the Centre and collected & appropriated by State, or Centre, or both. But it is also important to see that such funds or net proceeds are distributed to only those states where such taxes and duties are applicable. This very well brings out this aspect, or rather a question, as to what about those states where these provisions do not apply.
Well, may be our constitution makers knew about this query, hence, they also envisaged Article 269 where the net proceeds are assigned to the states as per the proportion so prescribed by the Parliament.
But does this not create a sense of unequal distribution of financial resources between the states? Those states capable to collect more due to their prosperity, appropriate it better. But then, what about those who are not able to collect enough of funds?
The Central Government needs to bring out an enactment which extinguishes unequal distribution of financial resources. It needs to give those states more that are not as prosper as other are so that they too can further the Directive Principles of State Policy. Only then we can achieve the status of a developed country.

Chapter 6: Other Integral Elements
Throughout this research article, the researcher has used various terminologies. To best understand what these are, this section has been inserted.

Consolidated Fund
The consolidated fund is covered under Article 266. Both the governments have their separate consolidated funds in the name of ‘Consolidated fund of India’ and ‘consolidated fund of that state’. Under this, all revenues generated by the Union, loans raised and the net proceeds form a part of it. It is just similar to any personal bank account wherein that natural or artificial person may be equated with Union of India or that particular state.
However, no money can be appropriated out of the consolidated fund unless the Constitution provides so.

Contingency Fund
The contingency fund is covered under Article 267. This is not constitutionally born but is established by law made by the Parliament or the States with respect to the ‘Contingency Fund of India’ or ‘Contingency Fund of that state’ respectively. Such type of Fund is creating for meeting any unforeseen expenditure. It is obviously determined by law, but is kept at the disposal of President or Governor, as the case may be.

Chapter 7: Summary
To sum up, the Constitution of India provides us with provisions regarding distribution of financial resources under chapter two of part twelfth. This is in consonance with the Federal, State and Concurrent list as mentioned under Seventh Schedule.
Herein, there are certain articles wherein the Government of India levies and collects taxes and duties while in rest the state collects it. In few, it is appropriated by that particular state government where it is applicable while in one, it is assigned to states. There is one such provision of surcharge wherein the whole job of levying, collection and appropriation is done by the Central Government.

Thus, the functional relationship between the federal and the state government is established by the way of these sections. It establishes a degree of cooperative federalism though a pinch of strong Union is reflected by Article 271.
However, it is keynote to understand that these are not exhaustive for the financial resources of the states. The states do receive grants from Centre and from such other manner which has been states from Article 273 onwards.

A collaborative reading suggests that those revenues and incomes generated in the name of the central government or of the Union form a part of the consolidated fund of India, this includes the tax and duties collected by the central government for the purpose or uses of itself and not of any state. There is separate consolidated fund made for each state. The consolidated fund of India is not to be used by the state.

In furtherance to these articles, the parliament needs to come up with certain legislation and enactment which would ensure the equal distribution of financial resource among all the states and help them to attain the status of a developed state. This is needed so much so for the reason that the tax and duties are appropriated and distributed to only those states where such tax and duty is applicable.