(ARTICLE 264 – 307)
CHAPTER I | FINANCE | ARTICLE 264 – 291 |
CHAPTER II | BORROWING | ARTICLE 292 – 293 |
CHAPTER III | PROPERTY | ARTICLE 294 – 300 |
CHAPTER IV | RIGHT TO PROPERTY | ARTICLE 300A |
FINANCE COMMISSION
In this Part, ‘Finance Commission’ means a Finance Commission constituted under article 280.
NO TAX EXCEPT BY AUTHORITY OF LAW
No tax shall be levied or collected except by authority of law.
In old times, the Kings had the power to impose any tax any time on their people. The taxes used to be on whims and fancies of the ruler and the officials, based on the needs of the empire.
As we transition to democratic society, the taxes are agreed up and decided by the representatives of the people based on the needs of the country. The executive authorities don’t have the power to levy any new tax, except by the authority of the law. To levy any new tax, the respective Legislature authorised by the Constitution to do so, has to pass a bill in this regard with majority of the members present and voting. Unless approved by the appropriate Legislature, the executive cannot levy any new tax. Similarly, no existing tax can be varied, without the authority of the law.
CONSOLIDATED FUNDS AND PUBLIC ACCOUNTS OF INDIA AND ITS STATES
To withdraw money from the Consolidated Fund of India, authorisation of the Parliament is required in the form of an Appropriation Act, which is a Bill passed by the Parliament for appropriating specific money out of such a fund for specific purpose. Similarly, to withdraw money from the Consolidated Fund of a state, authorisation of the respective state Legislature is required in the form of an Appropriation Act, which is a Bill passed by the Legislature of the state, for appropriating specific money out of such a fund for specific purpose. Such money cannot be used in excess of amount or for any other purpose specified in such an Appropriation Act.
To withdraw money from the Public Accounts, Appropriation Act is not required.
CONTINGENCY FUND
The Parliament or the state Legislature may establish Contingency Fund for the Union/state to meet unforeseen expenditures of the Union/state. To withdraw money from the Contingency Fund, Appropriation Act is not required.
DUTIES LEVIED BY THE UNION BUT COLLECTED AND APPROPRIATED BY THE STATES
The Stamp Duty is mentioned in the Union List but is collected and appropriated by,
Similarly, the Excise Duty on Medicinal and toilet preparations containing alcohol and narcotics is also levied by the Union but collected and appropriated by the states.
TAXES LEVIED AND COLLECTED BY THE UNION BUT APPROPRIATED BY THE STATES
The 101st Constitutional Amendment Act (2016), provided for introduction on Goods and Services Tax (GST) which replaced platitude of other Center-state taxes. It inserted Article 269A for the same, since otherwise the original Article 269 would have mandated that the entire proceeds of the GST on interstate goods and services would go to the states, which would have been detrimental to the interests of the Union.
ARTICLE 269A
GST shall be levied and collected by the Central Government and such tax shall be apportioned between the Union and the states in the manner, as may be provided by the Parliament by law, on the recommendations of GST Council. Such proceeds from GST shall not be part of the Consolidated Fund of India or of a state.
Provisions of Article 269 shall be applicable only to those goods which have been excluded from the implementation of GST.
NOTE – The Supreme Court has held that lottery, gambling and betting are taxable under the Goods and Services Tax (GST) Act. Parliament has the competence to levy GST on lottery, gambling and betting under Article 246A of the Constitution.
TAXES LEVIED AND COLLECTED BY THE UNION, AND DISTRIBUTED BETWEEN UNION AND THE STATES
The 80th Constitutional Amendment Act (2000) amended Article 270, and provided that revenue form all duties and taxes on items in the Union List shall be distributed between Union and the states, except the following,
Therefore, now the states do not just get a share out of the total income tax revenues of the Union, but get share out of the total revenues of the Union.
NOTE – The 14th Finance Commission recommended the Union Government to share 42 percent of its gross revenue with the states. However, the actual amount shared has been at about 36 percent.
SURCHARGE ON CERTAIN DUTIES AND TAXES FOR PURPOSE OF THE UNION
Notwithstanding anything in articles 269 and 270, Parliament may at any time impose a surcharge on any of the duties or taxes referred to in those articles, for purposes of the Union, and the whole proceeds of any such surcharge shall form part of the Consolidated Fund of India.
The Parliament may impose a surcharge on any of the duties or taxes levied or collected by it, and the whole proceeds of such a surcharge would go to the Consolidated Fund of India.
The 101st Constitutional Amendment Act (2016) amended Article 271 to exclude goods and services under the ambit of GST from any surcharge under the provisions of this Article.
TAXES LEVIED AND COLLECTED BY THE UNION, AND MAY BE DISTRIBUTED BETWEEN UNION AND THE STATES
Under this category falls the excise duties included in the Union list except those on medicinal and toilet preparations. These are levied and collected by the centre, and the proceeds form part of the Consolidated Fund of India. The net proceeds of such duties and taxes can be paid to the states out of the consolidated Fund of India only if the parliament so provides. Further, the principles of distribution shall also be laid down by the parliament.
The 80th Constitutional Amendment Act (2000) provided for alternate mechanism of tax revenue sharing between Union and the states, and as such repealed Article 272.
GRANT IN AID IN LIEU OF EXPORT DUTY ON JUTE AND JUTE PRODUCTS
There shall be charged on the Consolidated Fund of India, grant in aid for the states of Assam, Bihar, Orissa, and West Bengal, in lieu of the right to levy export duty on Jute and Jute Products from these states.
PRIOR RECOMMENDATION OF PRESIDENT REQUIRED FOR BILLS AFFECTING TAXATION IN WHICH STATES ARE INTERESTED
Following Bills cannot be introduced in the Parliament without the prior assent of the President:
GRANT IN AID TO THE STATES
The Parliament may make grants-in-aid from the Consolidated Fund of India to such states as are in need of assistance (Art.275), particularly for the promotion of welfare of tribal areas, including special grant to Assam.
TAXES ON PROFESSION
The state Legislature can make laws providing for tax on professions, trades, callings or employment in an area, for the benefit of the state, or of a municipality, district board, local board or other local authority concerned with the area. However, the total amount of such tax payable by a person shall not exceed INR 2500 per annum.
The Parliament has the exclusive power to make laws providing for tax on income from such professions, or trades, or callings or employments. The state Legislatures don’t have the power to levy tax on income from such professions, or trades, or callings or employments.
Here it must be noted that professional tax is different from income tax. It is not the tax on the income from a profession but the tax on the practice of the profession itself. While professional tax is a state tax, income tax is a central tax. Generally the professional tax is deducted by the employer from the employees salary every month and remitted to the state. Professional tax is compulsory and exempt from income tax i.e. the amount paid as professional tax can be shown as deduction from your income for the purpose of tax calculation.
Any taxes, duties, cesses or fees which immediately before the commencement of this Constitution, were being lawfully levied by the Government of any state or by any municipality or other local authority or body for the benefit of the state, municipality, district or other local area may continue to be levied and to be applied to the same purposes until provision to the contrary is made by Parliament by law, notwithstanding that those taxes, duties, cesses or fees are mentioned in the Union List.
AGREEMENT WITH STATES IN PART B RELATED TO CERTAIN FINANCIAL MATTERS
CALCULATION OF NET PROCEEDS OF TAXES OR DUTIES
Net Proceeds in relation to any taxes or duties refers to the proceeds thereof reduced by the cost of collection. The net proceeds shall be determined and certified by the Comptroller and Auditor-General of India, whose certificate shall be final.
Net Proceeds of Taxes or Duties = Total Proceeds of Taxes or Duties – Cost of Collection of such Taxes or Duties.
GST COUNCIL
The 101st Constitutional Amendment Act (2016) provides for the setting up of a GST council. The key features of the council are mentioned above.
Every decision of the GST Council shall be made by a majority of not less than three-fourths of the weighted votes of the members present and voting where Centre carries a weightage of one-third and all the states together have a weightage of two-thirds.
One half of the total number of Members of the Goods and Services Tax Council shall constitute the quorum at its meetings.
FINANCE COMMISSION
Article 280 makes it a Constitutional obligation upon the President to constitute a Finance Commission. Therefore, the President must constitute a Finance Commission even if the Council of Ministers do not advise him to do so.
The Finance Commission shall consist of a Chairman and four other members to be appointed by the President. The Parliament has under the provisions of Article 280 (3) enacted the Finance Commission Act (1951). Accordingly, the Chairman shall be a person having experience in public affairs. The other member of the Finance Commission must be selected amongst persons who:
The members hold the office for a period specified in the Presidential Order. The members can be reappointed to the commission. The Commission has been vested with the powers of the Civil Court in respect of summoning and enforcing the attendance of witnesses, production of documents etc.
It must be noted that the recommendations of the Finance Commission are only of advisory nature, and hence not binding upon the government. However, since it is a Constitutional body of quasi-judicial nature, its recommendations must not be turned down by the Government, unless there are very strong reasons to do so.
RECOMMENDATIONS OF THE FINANCE COMMISSION
The President shall cause every recommendation made by the Finance Commission to be laid before each House of Parliament.
The Commission submits its report to the President who lays it before both the Houses of the Parliament. The report mentions the recommendations made by the Finance Commission to the Government, and the actions taken by the Government on these recommendations.
GRANT FOR PUBLIC PURPOSE
The Union or a state may make any grants for any public purpose, notwithstanding that the purpose is not one with respect to which Parliament or the Legislature of the state, as the case may be, may make laws.
CUSTODY OF THE CONSOLIDATED FUND, CONTINGENCY FUND, AND MONEY CREDITED TO THE PUBLIC ACCOUNTS
The Parliament (or the state Legislature) has the power to regulate the custody as well as the manner of withdrawal of money from the Consolidated Fund, Contingency Fund, or any Public Account of India ( or of a state).
CUSTODY OF MONEYS RECEIVED BY PUBLIC SERVANTS AND COURTS
All moneys received by or deposited with,
shall be paid into the public account of India or the public account of state, as the case may be.
All money received by the Public Servants and the Courts, in relation to the affairs of the Union as well as the states, must be paid into the Public Accounts of India or of the state, as the case may be, except when such a money relates to the revenue of the government or is raised by the government through other sources.
EXEMPTION OF THE PROPERTY OF THE UNION FROM STATE TAXATION
The property of the Union shall be exempt from all taxes imposed by a state or by any authority within a state.
Additional Info – The Parliament may authorise state government to impose tax on any or all of the properties of the Union within such a state.
RESTRICTION ON STATE GOVERNMENTS TO IMPOSE TAXES ON TRADE AND COMMERCE
Additional Info – Self Explanatory.
RESTRICTION ON STATE GOVERNMENTS TO IMPOSE TAXES ON ELECTRICITY CONSUMED BY UNION GOVERNMENT
Unless the Parliament explicitly provides otherwise, no law of a state shall impose, or authorise the imposition of, a tax on the consumption or sale of electricity (whether produced by a Government or private enterprise) which is –
Additional Info – Self Explanatory.
RESTRICTION ON STATE GOVERNMENTS TO IMPOSE TAXES ON WATER AND ELECTRICITY IN CERTAIN EXCEPTIONAL CASES
Additional Info – Self Explanatory.
EXEMPTION OF THE PROPERTY OF THE STATE FROM UNION TAXATION
Additional Info – Self Explanatory.
BORROWING BY THE GOVERNMENT OF INDIA
The executive power of the Union extends to borrowing from the Consolidated Fund of India within such limits, if any, as may from time to time be fixed by Parliament by law, and to the giving of guarantees within such limits, if any, as may be so fixed.
The Union Government can borrow money against the Consolidated Fund of India i.e. it can take loans by keeping Consolidated Fund of India as the security. Similarly, it can give guarantees against the Consolidated Fund of India for the projects or programs it undertakes.
In short, Article 292 provides the Union Government the power to take loans by providing Consolidated Fund of India as security against such loans. There is no limitation on the power of the Union government to borrow against the Consolidated Fund of India. While borrowing money, the Government should ensure that the money generated through such borrowing is used for productive uses. If it fails to do so, it would mean that the government ends up paying more money than it borrowed, leading to greater fiscal deficits. Therefore, the Constitution subjects this power of the Government to borrow to the laws created by the Parliament in this regard.
CURRENT SCENARIO
Before, we try to understand the current scenario, it is very important to understand the components of Governments’ Budget. The Annual Budget comprises Revenue Budget and Capital Budget.
REVENUE BUDGET – It consists of receipts of tax revenues and non-tax revenues and the expenditures on interest payments, administrative work, social and economic services, grants to states, expenditures of Union Territories without Legislatures and grants to foreign countries. In a nutshell, it is a statement of all the revenue the government generates, and all the routine expenditures of the Government.
REVENUE BUDGET OF UNION GOVERNMENT | |
REVENUE EARNINGS | REVENUE EXPENDITURE |
Tax Receipts (Income Tax, GST, Excise etc) | Interest Payments on loans taken |
Non Tax Receipts (Fee, Challans, Service Charges, Surcharges etc) | Expenditure on social and economic programmes (Food Security, Education, Health etc) |
Interest earnings on loans granted | Administrative salaries and infrastructure cost |
Grant in aid given to states, and foreign countries |
CAPITAL BUDGET – It consists of loans, borrowings, recoveries of loans, external grants received, disinvestment of public enterprises, and so on, and expenditures on non-plan items, acquisition of assets, investments in shares and loans, advances to states and Union Territories to create assets, public undertakings and foreign governments. In a nutshell, it is a statement of all the money government gets for asset development, and all the money it spends on creation of assets.
CAPITAL BUDGET OF UNION GOVERNMENT | |
CAPITAL EARNINGS | CAPITAL EXPENDITURE |
Loan recovery (i.e. getting back principle amount of loan granted) | Loan repayment |
Grant in aid received from foreign countries | Expenditure on infrastructure (roads, railways, waterways, government buildings, irrigation pipelines and tanks, etc |
Disinvestment of public enterprises | Purchase of new assets for government infrastructures (e.g. purchase of land for setting up a stadium) |
Grant in aid to states for infrastructure development | |
Government investments |
The objective of a governments financial management should be to establish Revenue Surplus Budget, which should be used to create assets under the Capital Budget. The government may raise loans to finance the creation of a system of infrastructure and productive public enterprises, which will give reasonable returns annually, which would facilitate rapid economic development.
It is to be noted that so far, the Parliament has not enacted any statutory measures with regard to its borrowing powers under Article 292, and as such there is no limitation upon the borrowing power of the Union Government as of now. Therefore, the Union Government most of the times end up spending more than they could generate, leading to fiscal deficits. One of the main reasons for this has been appeasement politics where the government spends more money on popular policies and programs based on freebies, for which it prefers to borrow money. It is done because withdrawing the money directly from the Consolidated Fund of India would need approval of the Parliament while borrowing against this Fund does not since it comes under the Charged Expenditure (Non-Votable Expenditure). As voting by Parliament is not needed in passing the charged expenditures, there is a tendency on the part of the government to raise borrowing indiscriminately at its discretion, so much so that the proportion of charged items in the Budget has reached 80 percent of the total disbursements. Rather than working to create revenue generating assets from the borrowed money, the Government uses it to fund its popular programs. Infact, failure to return borrowings from international institutions and countries, forced India to open its economy in a haphazard manner in 1991. Most of our sectors had not developed fully to be able to compete with international markets.
Nevertheless, in 2003, the Parliament passed the Fiscal Responsibility and Budget Management Act (FRBM), making it obligatory for the Union government to take appropriate measures to reduce fiscal and revenue deficit, and subsequently move to budget surplus economy (where government revenues must be more than government expenditures). However, this is not enough. To control ever increasing fiscal deficits, the government either resorts to easy route of printing more money (which leads to depreciation of the currency, which further deteriorates the economy through inflation) or reduces the capital expenditure itself, which leads to growth stagnation. While trying to control the governments’ borrowings, it is equally important to safeguard expenditure that creates future income. Unless the Parliament acquires effective control over borrowings and effectively scrutinises the utilisation of the loans raised in the past, the present state of Parliament allowing 80 percent of the grants without any voting will worsen in the years to come. Then the need for Parliament exercising control over the purse will become an absolute myth.
BORROWING BY THE STATES
Article 293 provides that the states can borrow only from internal sources, and not from external sources, which is an exclusive power of the Union only.
The Government of India may grant loans or guarantees to a state, and such expenditure of the Government of India is charged upon the Consolidated Fund of India i.e. such an expenditure of the Government of India is not put to vote in the Parliament. The Government of India usually provides such loans or guarantees to the states for implementation of Central schemes in the states. This power of the Union Government ironically makes states dependent on the Union for such internal borrowings. The states where the same party is in power as is in the Centre, gets the major chuck on such borrowings while the others are deprived. This makes this provision as a potential tool in the hands of the Union Government to control the politics of the states. Ironically, this provision also enables the Union Government to interfere in the implementation of programs and policies related to subject matters which otherwise fall in the state List.
It is to be noted that Article 293 Clause (3) prohibits the states from borrowing money (i.e. raising a fresh loan) unless the previously borrowed money from the Government of India has been fully utilised. This makes states having outstanding loans with the Union Government dependent on it for funding their further needs, since these states cannot borrow money from open market unless they pay back the Union Government the previous loans.
CURRENT SCENARIO
As per a recent HSBC report, the quality of state spending has been gradually worsening over the past few years. The share of states’ revenue expenditure in total expenditure has remained around 80 percent or more, leaving less than 20 percent for capital expenditure, for which the states need to borrow to meet their needs. The combined deficit of the states combined has been now more than that of the Centre. The fiscal consolidation of the Centre has been getting offset by fiscal expansion of the states.
Debt is considered sustainable if debt-GDP ratio is stable or on a declining path. While debt ratios for the Central government are projected to decline under plausible assumptions, the behaviour of the states is strikingly different. The debt ratio for the states is actually projected to increase. This is mainly because the primary deficit (total deficit excluding the interest payments), a driving variable in debt dynamics, is much higher for the states compared to the Centre. While the Centre borrows largely for revenue spending and current consumption like wages, salaries, the states do so for capital expenditure like infrastructure. In addition, the states spend a lot on delivering public services which are growth enhancing, such as health and education, and are the prime responsibility of the states. Therefore, to ensure that the states continue to spur growth, it is important that they are allowed to borrow for their projects and programs.
However, while according permission to states to undertake fresh borrowings, their expenditure quality should be a prime determinant. There is also a need to incorporate ‘Fiscal Discipline’ as a criteria for devolution of fiscal share by the Union to the states. Fiscal discipline as a criterion for tax devolution was used by Eleventh, Twelfth and Thirteenth Finance Commissions for incentivising the states in prudent management of their finances. Many state governments have already adopted state level fiscal laws and adhered to the 3 percent fiscal target under the state level FRBMs (Fiscal Responsibility and Budget Management Act). Fiscal prudence exercised by the Central government has been widely acclaimed. The management of state finances must not undercut this important achievement which is central to investor confidence and enhanced credit rating.
RESOURCES OF THE TERRITORIAL WATERS AND EXCLUSIVE ECONOMIC ZONES TO VEST IN THE UNION
All natural resources of territorial waters as well as exclusive economic zones belong to the Union government, which holds them in trust for citizens.
It also empowers the parliament to make law for the limits of the territorial waters, the continental shelf, the exclusive economic zone and other maritime zones of India. At present, India’s territorial zone and exclusive economic zone extends up to 12 nautical miles and 200 nautical miles from the baseline respectively.
(1 Nautical Mile ~ 1.82 kms)
POWER TO CARRY TRADE, HOLD OR DISPOSE PROPERTY, MAKE CONTRACTS
CONTRACTS
SUITS AGAINST THE GOVERNMENT OF INDIA AND THE STATES
The Government of India may sue or be sued by the name of the Union of India and the Government of a state may sue or be sued by the name of the state.
PERSONS NOT TO BE DEPRIVED OF PROPERTY EXCEPT BY THE AUTHORITY OF LAW
No person shall be deprived of his property except by the authority of law.
Earlier, Right to Property was a fundamental right under Article 31. However, the Parliament converted this fundamental right into legal right by 44th amendment act, 1978. As such Article 31 was repealed and Article 300A was inserted into the Constitution.
FREEDOM OF TRADE, COMMERCE AND INTERCOURSE
Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free.
POWER OF THE PARLIAMENT TO IMPOSE RESTRICTIONS ON TRADE, COMMERCE AND INTERCOURSE
Parliament may by law impose such restrictions on the freedom of trade, commerce or intercourse between one state and another or within any part of the territory of India as may be required in the public interest.
Anything which directly hinders the free flow of trade, commerce & intercourse between two parts of India, constitutes restriction within the meaning of Article 302. In specific circumstances, restriction may include total prohibition.
It may be pointed out that the word “restrictions” is unqualified, that is, restrictions are not required to be reasonable or otherwise. The absence of such qualification authorises the Parliament to impose any restrictions and excludes judicial review. In other words, Parliaments determination of the restrictions shall be final and no Court can judge whether they are unreasonable, excessive or prohibitive. However, by qualifying the power with public interest, some degree of inherent limitation is imposed. Thus, the courts can declare such restrictions to be null and void, if they are not found to be imposed because of genuine public interest.
RESTRICTIONS ON THE LEGISLATIVE POWERS OF THE UNION AND STATES WITH REGARD TO TRADE AND COMMERCE
POWER OF THE STATES TO IMPOSE RESTRICTIONS ON TRADE, COMMERCE AND INTERCOURSE
Notwithstanding anything in article 301, the Legislature of a state may by law –
Although Article 304 Clause (b) provides the state Legislatures to impose reasonable restrictions on trade, commerce or intercourse with other states or within the state, this power could be exercised only with the previous sanction of the President. If the President declines to grant his assent to such a proposal, the state Legislature cannot pass a law in this regard.