Finances are very fundamental in the successful operation of the federal system.
Indian constitution distributes financial powers between the union and states in a
comprehensive arrangement that is broadly modeled on the 1935 Government of India
Act.
There are two sources of revenue distributed by the constitution namely Tax Revenue and Non-tax Revenue.
A) Tax Revenue Distribution
There are five important ways in which the tax revenues are distributed between the union and state governments.
- Certain taxes like Corporation tax and Custom tax are exclusively allotted to the central government
- Certain taxes like sales tax are exclusively allotted to the states
- Certain taxes are levied by the Union but collected and appropriated by the concerned states and the examples are stamp duties on Bills of Exchange and Excise duties on medicinal and toilet preparations containing alcohol
- Certain taxes are levied and collected by the union government but the proceeds are assigned to the states in which they are levied like the taxes on the sale of advertisements in newspapers.
- Certain taxes are levied and collected by the state governments and are distributed between the union and state governments in a certain proportion like the tax on income other than an agricultural income.
B) Non-tax Revenue Distribution
Both the union and state governments are provided with non-tax revenue sources. The union government gets its revenue from the receipts from commercial and industrial undertakings relating to central subjects like Industrial Finance Corporation.
It gets its revenue from Railways, Posts, and Telegraphs, Broadcasting, etc. The state governments get revenue from the receipts of commercial enterprises and industrial undertakings allotted to them.
The sources among others include forests, irrigation, electricity, road transport. The constitution understands the greater financial needs of certain states and therefore the Article 275 asks the union government to provide Grants-in Aid to the states like Assam keeping in mind the imperative of the development and welfare of the tribal population.