KIIT LAW SCHOOL

Constitutional Law II
Project on
Evolution and Development of Decentralization
Submited by:- Submited To:-
Amin Khan Mrs.Kyvalya Garikapati
Roll No-1583127 Assistant Professor
Sec -B.ALLB(B)

ACKNOWLDEGEMENT

With a deep sense of gratitude I express thanks to all those who have been
instrumental in the development of the project report.

We are also grateful to KIIT School of Law, Bhubaneswar gave me a valuable

opportunity of involving me in real analytical project. I am thankful to the professors
of constitutional Law II Ass Prof Mrs.Kyvalya Garikapat whose positive attitude,
guidance and faith in my ability spurred me to perform well.

We are also indebted to all lecturers, friends and associates for their valuable advice,
stimulated suggestions and overwhelming support without which the project would
not have been a success.
 Introduction

India to be a “Union of States”. In effect, India is a federation consisting of one

National or Union Government and a number of Governments of the federating units
such as the states and the Union Territories.In such a composite polity, it is essential
that the financial resources should be divided between the Union Government and the
government of the federating units.
The Finance Commission of India was formed on 22nd November, 1951. The Finance
Commission has been provided for by the Indian constitution as part of the scheme of
division of financial resources between the two different sets of governments

The Finance Commission of India was formed on 22nd November, 1951. The Finance
Commission has been provided for by the Indian constitution as part of the scheme of
division of financial resources between the two different sets of governments.

 The role Finance Commission in India is to act as an instrument to divide

proceeds of divisible taxes between the states and the Union government or in
cases of taxes that are collected by the centre but the proceeds of which are
allocated between the states, to determine the principles of such allocation.
 The Finance commission of India also determines the principles of governing the
grants-in-aids of the revenues of states out of the consolidated fund of India. It is
an important function of the Indian Finance Commission.
 Thirdly the commission has the duty of considering any matter referred to the
commission by the President in the interest of sound finance.

Financial Relation Between Centre And State In India

The Financial relationship between the Centre (Union) and the States is provided in
the constitution. The constitution gives a detailed scheme of distribution of financial
resources between Union and the States.

The Indian constitution makes a broad distinction between the power to levy a tax and
the power to appropriate the proceeds of a tax. Thus, the legislature which levies a tax
is not necessarily the authority which retains the proceeds of a tax levied.

The constitution grants the Union Parliament exclusive power to levy taxes on several
items. The state legislatures enjoy similar power with regard to several other specified
items. In general, the Union Parliament levies taxes on items mentioned in the union
list while the state legislatures levy taxes on items mentioned in the state list.

Besides the exclusive power of taxation of the union and the state governments,
there are 3 other categories of taxes.

1. Taxes levied by the union government but collected and appropriated by the
states. Stamp duties on bills of exchange, excise duties on medicinal and toilet
preparations fall in this category.
2. Secondly, certain duties are levied and collected by the union but the net
proceeds of such taxes are distributed among the states. Each state gets that
amount of the tax as is collected within its territory. Succession duty, estate
duty on property other than agricultural land, taxes on railway fares and freights,
taxes on newspaper sales and advertisements etc. fall in this category.
3. Thirdly, certain taxes are levied and collected by the union but the proceeds
are distributed between the centre and the states. Taxes on non-agricultural
incomes (Art. 270) and excise duties on items in the union list accept medicinal
and toilet preparations, fall in this category.

In this scheme of resource distribution, the central government in India, indeed in

every federation has more money than it needs. This is because, the central
government is the government at a distance whereas the state governments are the
governments at hand to the people. The most productive sources of revenue in every
federation are with the centre while the most expensive heads of expenditure are with
the states. For the State Governments are directly responsible for the maintenance of
law and order and are charged with the responsibility of carrying on welfare activities
such as education, health care, etc. consequently the states have less revenue incomes
than they need. This makes the states financially dependent on the centre which the
ruling party at the centre may use to serve its political ends.
 Borrowing power of Union

Which means that,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.

Consolidated Fund For Union-Under Article 266 (1) of the Constitution of India, all
revenues ( example tax revenue from personal income tax, corporate income tax,
customs and excise duties as well as non-tax revenue such as licence fees, dividends
and profits from public sector undertakings etc. ) received by the Union government
as well as all loans raised by issue of treasury bills, internal and external loans and all
moneys received by the Union Government in repayment of loans shall form a
consolidated fund entitled the 'Consolidated Fund of India' for the Union Government.

There are also some other way to rays fund like the imposing tax policy.
The subjects on which the union government have the exclusive powers to levy taxes
are:

1. Customs duty,
2. Corporation tax,
3. Capital gains,
4. Curcharge on income tax,
5. Railway fares etc.

The residuary power of taxation belongs to the centre. It means that the subjects
which have not been included either in the union or in the state list may be taxed only
by the union government.In the matter of taxation, the constitution recognizes no
concurrent jurisdiction. Hence there is no subject who may be taxed both by the union
and the state governments.
 Borrowing Power of the State Goverment

Article 293 of Constitution of India defines the Borrowing power of the State-
 Subject to the provisions of this article, the executive power of a State extends to
borrowing within the territory of India upon the security of the Consolidated
Fund of the State within such limits, if any, as may from time to time be fixed by
the Legislature of such State by law and to the giving of guarantees within such
limits, if any, as may be so fixed

 The Government of India may, subject to such conditions as may be laid down by
or under any law made by Parliament, make loans to any State or, so long as any
limits fixed under Article 292 are not exceeded, give guarantees in respect of
loans raised by any State, and any sums required for the purpose of making such
loans shall be charged on the Consolidated Fund of India

 A State may not without the consent of the Government of India raise any loan if
there is still outstanding any part of a loan which has been made to the State by
the Government of India or by its predecessor Government, or in respect of which
a guarantee has been given by the Government of India or by its predecessor
Government

 A consent under clause ( 3 ) may be granted subject to such conditions, if any, as

the Government of India may think fit to impose CHAPTER III PROPERTY,
CONTRACTS, RIGHTS, LIABILITIES, OBLIGATIONS AND SUITS

Sub-clause (1) states the general principle that the State Government is free to borrow
money within the territory of India upon security of the Consolidated Fund of the
States. Two safeguards are key— first, the limits on such borrowing may be fixed by
the State Legislature from time to time and second, the freedom to borrow is subject
to the rest of the article, i.e. the remaining sub-sections. Limits on State borrowings
have been specified by fiscal responsibility legislations in States, a matter that we will
turn to presently;14 the restrictions in the article itself may be found in sub-clauses (2),
(3) and (4) which is the focus of attention in this section.

Sub-clause (2) provides a restriction on the State Government’s freedom to borrow in

a situation when the loan in question is made by the Central Government or
guaranteed by it. In such a situation the Parliament may lay down conditions for such
loan or prescribe limits only within which guarantees on loans can be given. This is
conceptually sound since a lender has the right to specify the terms and conditions of
lending. When such a loan has been taken and the State is still indebted to the Centre
it or any other loan, or when the Central Government is a guarantor on a loan taken by
a State, in such situations

sub-clause (3) provides that the State Government must seek the consent of the
Central Government before raising any loan.

Sub-clause (4) allows the Central Government to prescribe conditions it deems fit. It
is instructive to note that unlike Section 163 of the GOI Act there is no default rule
that such consent ought to be provided. This is also logical— the Central Government,
not only by virtue of being a creditor, but also being responsible for macroeconomic
stability in the country, should play a determinative part in State borrowings from the
market.

The State government can borrow only within India, upon the security of the
consolidated fund of the state or can give guarantees, but both within the limits fixed
by the legislature. central govt can give loans to the state or can give guarantees in
respect to the loans raised by the state. A state can not raise a loan without the consent
of the central govt. if any lone is outstanding with the center or in respect of which
guarantee has been given by the center.

Consolidated fund For State:-under Article 266 (1) of the Constitution of India, a
Consolidated Fund Of State ( a separate fund for each state) has been established
where all revenues ( both tax revenues such as Sales tax/VAT, stamp duty etc..and
non-tax revenues such as user charges levied by State governments ) received by the
State government as well as all loans raised by issue of treasury bills, internal and
external loans and all moneys received by the State Government in repayment of
loans shall form part of the fund.
The Comptroller and Auditor General of India audits these Funds and reports to the
Union/State legislatures when proper accounting procedures have not been followed.

State’s exclusive power to Tax include:

1. land revenue
2. Stamp duty,
3. Estate duty,
4. Agricultural income,
5. Entry tax,
6. Sales tax,
7. Taxes on vehicles and luxuries etc.

India largest recipient of loans from World Bank

India is the largest recipient of loans from the World Bank, amounting to $102.1
billion, between 1945 and 2015 (as on July 21, 2015), according to the Bank’s
lending report.While the International Bank for Reconstruction and Development
(IBRD), a part of the World Bank group, has lent $52.7 billion, the International
Development Association (IDA), a multilateral concessional lender of World Bank,
has loaned $49.4 billion to India over the last 70 years.The Ministry of Finance tabled
an updated figure of $103 billion (IBRD—$53 billion and IDA—$50 billion) in
a reply to the Lok Sabha (Parliament’s lower house) last month.

India’s loans from the World Bank stand at $104 billion (IBRD—$54 billion and
IDA—$50 billion) as on December 31, 2015. Of this, the World Bank has disbursed
$73 billion, with India repaying $37 billion.India is followed by Brazil ($58.8 billion),
China ($55.6 billion), Mexico ($54 billion) and Indonesia ($50.5 billion).

The World Bank has been lending funds to India for rural and urban
development projects related to transport, water and irrigation, health, power and
agriculture.

India received 9% ($2.1 billion) of IBRD commitments, the largest to any country in
2015 and, after Bangladesh, the second-largest ($1.7 billion) in terms of IDA
assistance ($1.9 billion).

Water, sanitation and flood projects in India received the most World Bank funding
(27%), followed by finance (19%), transportation (18%), education (11%), public
administration and law (10%), agriculture (8%), health and social service (4%),
information and communication (2%), and energy and mining (1%).

India received a loan of $3.8 billion in 2015, the largest in the sub-continent, followed
by China ($1.8 billion) in East Asia and Pacific, Nigeria ($1.5 billion) in Africa,
Ukraine ($1.3 billion) in Europe and Central Asia, Morocco ($1.1 billion) in the
Middle East and North Africa and Brazil ($0.6 billion) in Latin America and the
Caribbean region.
 Public Finance in India
Public finance means the financial transactions of the government. Under the federal
structure, the financial relationship between the union government and the state
governments are based on the principle of federal Finance. The Indian constitution
provides a three-fold distribution of legislative powers between the centre and the
states. The Seventh schedule of the constitution consists of the Union List, the state
list and the concurrent List. Union List includes the taxes which are levied, collected
and retained by the central government, while the State List includes those taxes
which are levied, collected and retained by the state governments.

Those taxes which are not specified in the first two lists are included in concurrent list.
To-avoid any dispute between the centre and states in the field of tax revenue, some
constitutional provisions have been made. The division of powers between the centre
and states in respect of the imposition and collection of tax revenue and the
appropriation of that revenue can be shown in the following:

Taxes levied, collected and appropriated by centre: (i) Customs duty, (ii)
Corporation tax.

Taxes levied and collected by centre but appropriated by both centre and states: (i)
Income tax, (ii) Union excise duty.

Taxes levied and collected by centre but appropriated by states: (i) Taxes on railway
freight and fares, (ii) Estate and succession duty other than agricultural land.

Taxes levied by centre but collected and appropriated by states: (i) rates of stamp
duties on financial documents, (ii) taxes other than stamp duties on transactions in
stock exchanges.

Taxes levied, collected and appropriated by states: (i) sales tax, (ii) land revenue.
The Indian constitution provides for the appointment of a finance commission, by the
president of India on five yearly bases to determine the basis of distribution of the tax
proceeds between centre and states.

In the context of resource mobilization for economic development during planning

period, public finance in India has assumed an altogether new significance with
renewed objectives. The objectives of taxation were revenue regulation and economic
control. The efficiency of public finance network can be accessed from the
standpoints of equity, economic consequences and Simplicity.

However in view of the less-developed country like India, the functions of public
finance, apart from its traditional functions should be to:

 curtain national consumption,

 reallocate resources to no more beneficial investments,
 provide funds for Government business, and,
 provide incentives to alter behavioral patterns in order to facilitate economic
growth.

Source of Revenue

The income of a government from taxation, excise duties, customs, or othersources,

appropriated to the payment of the public expenses. the government department
charged with the collection of such income. revenues, the collective items or amounts
of income of a person, a state, etc.

Source of Revenue for Central Government:-

It includes taxes on certain items mentioned in the Union List of the seventh schedule
and others.

Source of Non Tax Revenue for Central Government:

It includes:-
 Borrowings
 Income of government undertaking
 Income for government properties
 Interest earning on loans and advances
 Gifts, donations, grants and aid, etc.
 Fees (excluding court fees other than the supreme Court.

Source of Revenue for State Government:-

:
Taxes on the items contained in the State List of the seventh Schedule of the
Constitution which includes land revenue, taxes on agriculture income, sales tax, etc.

Source of Non Tax Revenue for Sate Government:

It includes:-

 Fee taken in all courses except Supreme Court

 Income of government undertakings
 Income from State owned property
 Borrowings
 Royalty from mines, forests, etc.
 Grants in Aid.
 Conclusion

Unsustainable levels of sub-national debt pose a threat to macroeconomic stability.

National concerns about macroeconomic risk are not internalised by individual States.
If no control is imposed on individual States, then each State will have an incentive to
“over-borrow”, relative to the norms that would ensure that macroeconomic stability
is maintained. To this end, the Centre ought to be able to exert some control over
individual States with a view to maintaining systemic stability. Legitimate concerns
that Central control of the fiscal capacity of States is a violation of the principles of
political and economic federalism must be balanced against the systemic risk posed to
the economy from the imprudent fiscal management of a handful of States. With this
in mind, we make the following alternate recommendations to extend Central
Government control over State borrowing.
 Bibliography

 http://dictionary.cambridge.org/dictionary/english/borrowing-po
wer
 https://indiankanoon.org/doc/268685/

 Fiscal Policy and Economic Reforms by Y.V.Reddy

 RESEARCH REPORT ON QUERIES RAISED BY THE

FOURTEENTH FINANCE COMMISSION