CHAPTER 20 – FINANCE, PROPERTY AND TRADE

 

FINANCE, PROPERTY AND TRADE

(ARTICLE 264 – 307)

 

 

PART XII OF THE CONSTITUTION (ARTICLE 264 – 300A)

 

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

 

 

CHAPTER I – FINANCE (ARTICLE 264 – 291)

 

 

ARTICLE 264

 

FINANCE COMMISSION

In this Part, ‘Finance Commission’ means a Finance Commission constituted under article 280.

 

 

ARTICLE 265

 

NO TAX EXCEPT BY AUTHORITY OF LAW

No tax shall be levied or collected except by authority of law.

 

DESCRIPTION

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.

 

 

ARTICLE 266

 

CONSOLIDATED FUNDS AND PUBLIC ACCOUNTS OF INDIA AND ITS STATES

  1. The Consolidated Fund of India or of a state shall comprise of,
    1. all revenues received by the Government of India/state.
    2. all loans raised by the Government of India/state by the issue of Treasury Bills.
    3. all other loans and advances (grant-in-aid) received by the Government of India/state.
    4. all money received by the Government of India/state in repayment of loans (loans which the Government of India/state had forwarded and are now being returned with or without interest).
  2. All other public moneys received by or on behalf of the Government of India or the Government of a state shall be credited to the public account of India or the public account of the state, as the case may be.
  3. No money shall be appropriated out of the Consolidated Fund of India or the Consolidated Fund of a state except in accordance with a law and for the purposes and in the manner provided in this Constitution.

 

DESCRIPTION

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.

 

 

ARTICLE 267

 

CONTINGENCY FUND

  1. Parliament may by law establish a Contingency Fund of India in the nature of an imprest, into which such amounts shall be paid as may be determined by the law of the Parliament, and which shall be placed at the disposal of the President who shall be authorised to lend money out of this fund to the Union for the purposes of meeting unforeseen expenditure, pending authorisation of such expenditure by Parliament.
  2. The Legislature of the state may by law establish a Contingency Fund of the state in the nature of an imprest, into which such amounts shall be paid as may be determined by the law of the state Legislature, and which shall be placed at the disposal of the Governor of the state who shall be authorised to lend money out of this fund to the state for the purposes of meeting unforeseen expenditure, pending authorisation of such expenditure by the Legislature of the state.

 

DESCRIPTION

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.

 

 

FINANCIAL RELATIONS BETWEEN THE UNION AND THE STATES (ARTICLE 268 – 275)

 

 

ARTICLE 268

 

DUTIES LEVIED BY THE UNION BUT COLLECTED AND APPROPRIATED BY THE STATES

  1. Such stamp duties as are mentioned in the Union List shall be levied by the Government of India but shall be collected –
    1. in the case where such duties are leviable within any Union territory, by the Government of India, and
    2. in other cases, by the states within which such duties are respectively leviable.
  2. The proceeds in any financial year of any such duty leviable within any state shall not form part of the Consolidated Fund of India, but shall be assigned to that state.

 

DESCRIPTION

The Stamp Duty is mentioned in the Union List but is collected and appropriated by, 

  1. the state Government, in case it is levied in the states.
  2. the Union Government, in case it is levied in the Union Territories.

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.

 

 

ARTICLE 269

 

TAXES LEVIED AND COLLECTED BY THE UNION BUT APPROPRIATED BY THE STATES

  1. The following duties and taxes shall be levied and collected by the Government of India but shall be assigned to the states,
    1. duties and taxes in respect of sale or purchase of property other than agricultural land.
    2. taxes on goods and passengers carried by railway, sea or air (replaced by GST)
    3. taxes on the sale and purchase of goods in the course of inter state trade or commerce (replaced by GST).
    4. taxes on transactions in stock exchanges and future markets.
  2. The net proceeds in any financial year of any such duty or tax as mentioned in Clause (1), except when such proceeds are from the Union territories, shall not form part of the Consolidated Fund of India, but shall be assigned to the states within which such duty or tax is leviable in that year, and shall be distributed among those states in accordance with such principles of distribution as may be formulated by Parliament by law.
  3. Parliament may by law formulate principles for determining what constitutes inter state trade and commerce. For the purposes of this clause, supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-state trade or commerce.

 

DESCRIPTION

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.

 

 

ARTICLE 270

 

TAXES LEVIED AND COLLECTED BY THE UNION, AND DISTRIBUTED BETWEEN UNION AND THE STATES

  1. Taxes on income other than agricultural income. For the purpose of this Article, the tax on income does not include corporation tax as well. 
  2. The net proceeds in any financial year of any such duty or tax as mentioned in Clause (1), except when such proceeds are from the Union territories, shall not form part of the Consolidated Fund of India, but shall be assigned to the states within which such duty or tax is leviable in that year, and shall be distributed among those states in such manner and from such time as may be prescribed by the Finance Commission.

 

DESCRIPTION

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,

  1. Duties and taxes referred to in Articles 268 and 269.
  2. Surcharge on duties and taxes under Article 271.
  3. Any cess levied for specific purpose by the Union.

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. 

 

 

ARTICLE 271

 

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.

 

DESCRIPTION

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.

 

 

ARTICLE 272 (REPEALED)

 

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. 

 

DESCRIPTION

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.

 

 

ARTICLE 273

 

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.

 

 

ARTICLE 274

 

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:

  1. A Bill which imposes or varies any tax or duty in which the states are interested.
  2. A Bill which imposes or varies the meaning of the expression ‘agricultural income’ for the purpose of taxation.
  3. A Bill which affects the distribution of the proceeds of Central revenue to and between the states.
  4. A Bill which imposes any such surcharge for the purposes of the Union.

 

 

ARTICLE 275

 

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.

 

 

ARTICLE 276

 

TAXES ON PROFESSION

  1. No law of the Legislature of a state, relating to taxes in respect of professions, trades, callings or employments for the benefit of the state or of a municipality, district board, local board or other local authority, shall be invalid on the ground that it relates to a tax on income.
  2. The total amount payable by any person to the state, or to any one municipality, district board, local board or other local authority in the state, by way of taxes on professions, trades, callings and employments shall not exceed INR 2500 per annum.
  3. The power of the Legislature of a state to make laws with respect to taxes on professions, trades, callings and employments shall not be construed as limiting in any way the power of the Parliament to make laws with respect to taxes on income accruing from or arising out of professions, trades, callings and employments.

 

DESCRIPTION

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. 

 

 

ARTICLE 277

 

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.

 

 

ARTICLE 278 (REPEALED)

 

AGREEMENT WITH STATES IN PART B RELATED TO CERTAIN FINANCIAL MATTERS

 

 

ARTICLE 279

 

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.

 

DESCRIPTION

Net Proceeds of Taxes or Duties = Total Proceeds of Taxes or Duties – Cost of Collection of such Taxes or Duties.

 

 

ARTICLE 279A

 

GST COUNCIL

  1. The President shall, by order, constitute a Council to be called the Goods and Services Tax Council (GST COUNCIL).
  2. The Goods and Services Tax Council (GST COUNCIL) shall consist of the following members, namely,
    1. the Union Finance Minister (Chairperson).
    2. the Union Minister of State for Finance (Member).
    3. the Finance Ministers of the states (Members).
  3. The Finance Ministers of the states shall, as soon as may be, choose one amongst themselves to be the Vice-Chairperson of the Council for such period as they may decide.
  4. The Goods and Services Tax Council (GST COUNCIL) shall make recommendations to the Union and the states on various matters related to the implementation of the Goods and Services Tax.

 

DESCRIPTION

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.

  • Weightage of vote of the Union Finance Minister and the Union Minister of state for Finance : 1/3rd
  • Weightage of vote of Finance Ministers of all the states combined: 2/3rd
  • Majority needed to pass a decision in GST Council : 3/4th of the total weighted votes.

One half of the total number of Members of the Goods and Services Tax Council shall constitute the quorum at its meetings.

 

 

ARTICLE 280

 

FINANCE COMMISSION

  1. The President shall, at the expiration of every fifth year or at such earlier time as the President considers necessary, by order constitute a Finance Commission which shall consist of a Chairman and four other members to be appointed by the President.
  2. It shall be the duty of the Commission to make recommendations to the President regarding,
    1. the distribution between the Union and the states of the net proceeds of taxes which are to be, or may be, divided between them under this Chapter and the allocation between the states of the respective shares of such proceeds
    2. the principles which should govern the grants in aid to the states out of the Consolidated Fund of India.
    3. the measures to increase the finances of the state so as to supplement the finances of the Panchayats as well as the Municipalities.
    4. any other matter referred to the Commission by the President in the interests of sound finance.
  3. The Commission shall determine their procedure and shall have such powers in the performance of their functions as Parliament may by law confer on them.

 

DESCRIPTION

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:

  1. are qualified to be a judge of the High Court.
  2. have special knowledge of the finance and accounts of the government.
  3. have wide experience in financial matters and administration.
  4. have special knowledge of economics.

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.

 

 

ARTICLE 281

 

RECOMMENDATIONS OF THE FINANCE COMMISSION

The President shall cause every recommendation made by the Finance Commission to be laid before each House of Parliament.

 

DESCRIPTION

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.

 

 

ARTICLE 282

 

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.

 

 

ARTICLE 283

 

CUSTODY OF THE CONSOLIDATED FUND, CONTINGENCY FUND, AND MONEY CREDITED TO THE PUBLIC ACCOUNTS

  1. The custody of the Consolidated Fund of India and the Contingency Fund of India, the payment of moneys into such Funds, the withdrawal of moneys therefrom, the custody of public moneys other than those credited to such Funds received by or on behalf of the Government of India, their payment into the public account of India and the withdrawal of moneys from such account and all other matters connected with or ancillary to matters aforesaid shall be regulated by law made by Parliament, and, until provision in that behalf is so made, shall be regulated by rules made by the President.
  2. The custody of the Consolidated Fund of a state and the Contingency Fund of a state, the payment of moneys into such Funds, the withdrawal of moneys therefrom, the custody of public moneys other than those credited to such Funds received by or on behalf of the Government of the state, their payment into the public account of the state and the withdrawal of moneys from such account and all other matters connected with or ancillary to matters aforesaid shall be regulated by law made by the Legislature of the state, and, until provision in that behalf is so made, shall be regulated by rules made by the Governor of the state.

 

DESCRIPTION

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).

 

 

ARTICLE 284

 

CUSTODY OF MONEYS RECEIVED BY PUBLIC SERVANTS AND COURTS

All moneys received by or deposited with,

  1. any officer of the Union or of a state (except the revenues or public moneys raised or received by the Government of India or the Government of the state, as the case may be) or
  2. any court within the territory of India to the credit of any cause, matter, account or persons,

shall be paid into the public account of India or the public account of state, as the case may be.

 

DESCRIPTION

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.

 

 

ARTICLE 285

 

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.

 

DESCRIPTION

Additional InfoThe Parliament may authorise state government to impose tax on any or all of the properties of the Union within such a state.

 

 

ARTICLE 286

 

RESTRICTION ON STATE GOVERNMENTS TO IMPOSE TAXES ON TRADE AND COMMERCE

  1. No Law of a state shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place –
    1. outside the state or
    2. in the course of the import of the goods into, or export of the goods out of, the territory of India.
  2. Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1).

 

DESCRIPTION

Additional Info – Self Explanatory.

 

 

ARTICLE 287

 

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 –

  1. consumed by the Government of India.
  2. consumed in the construction, maintenance or operation of any railway by the Government of India.

 

DESCRIPTION

Additional Info – Self Explanatory.

 

 

ARTICLE 288

 

RESTRICTION ON STATE GOVERNMENTS TO IMPOSE TAXES ON WATER AND ELECTRICITY IN CERTAIN EXCEPTIONAL CASES

  1. Unless the President explicitly orders otherwise, no law of a state shall impose, or authorise the imposition of, a tax in respect of any water or electricity stored, generated, consumed, distributed or sold by any authority, established by any law made by Parliament, for regulating or developing any inter-state river or river-valley. 
  2. The Legislature of a state may by law impose, or authorise the imposition of, any such tax as is mentioned in clause (1), but no such law shall have any effect unless it has, after having been reserved for the consideration of the President, received his assent.

 

DESCRIPTION

Additional Info – Self Explanatory.

 

 

ARTICLE 289

 

EXEMPTION OF THE PROPERTY OF THE STATE FROM UNION TAXATION

  1. The property and income of a state shall be exempt from Union taxation.
  2. The Parliament may impose tax on property of the state government used for trade and business carried within a state.
  3. Nothing in clause (2) shall apply to any trade or business within the state, which Parliament may by law declare to be incidental to the ordinary functions of the Union or state government.

 

DESCRIPTION

Additional Info – Self Explanatory.

 

 

CHAPTER II – BORROWING (ARTICLE 292 – 293)

 

 

ARTICLE 292

 

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.

 

DESCRIPTION

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.

 

 

ARTICLE 293

 

BORROWING BY THE STATES

  1. 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.
  2. The Government of India may, subject to such conditions as may be laid down by or under any law made by the 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. Any sums required for the purpose of making such loans shall be charged on the Consolidated Fund of India.
  3. A state may not, without the consent of the Government of India, raise any fresh loan if there is still outstanding any part of a previous loan 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.

 

DESCRIPTION

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.

 

 

CHAPTER III – PROPERTY (ARTICLE 294 – 300)

 

 

ARTICLE 297

 

RESOURCES OF THE TERRITORIAL WATERS AND EXCLUSIVE ECONOMIC ZONES TO VEST IN THE UNION

  1. All lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or the exclusive economic zone, of India shall vest in the Union and be held for the purposes of the Union.
  2. All other resources of the exclusive economic zone of India shall also vest in the Union and be held for the purposes of the Union.
  3. The limits of the territorial waters, the continental shelf, the exclusive economic zone, and other maritime zones, of India shall be such as may be specified, from time to time, by or under any law made by Parliament.

 

DESCRIPTION

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)

 

 

ARTICLE 298

 

POWER TO CARRY TRADE, HOLD OR DISPOSE PROPERTY, MAKE CONTRACTS

  1. The executive power of the Union and of each state shall extend to,
    1. the carrying on of any trade or business.
    2. the acquisition, holding and disposal of property.
    3. the making of contracts for any purpose.
  2. Provided that –
    1. the said executive power of the Union shall, in so far as such trade or business or such purpose is not one with respect to which Parliament may make laws, be subject in each state to legislation by the state; and
    2. the said executive power of each state shall, in so far as such trade or business or such purpose is not one with respect to which the state Legislature may make laws, be subject to legislation by Parliament.

 

 

ARTICLE 299

 

CONTRACTS

  1. All contracts made in the exercise of the executive power of the Union or of a state shall be expressed to be made by the President, or by the Governor of the state, as the case may be, and all such contracts and all assurances of property made in the exercise of that power shall be executed on behalf of the President or the Governor by such persons and in such manner as he may direct or authorise.
  2. Neither the President nor the Governor shall be personally liable in respect of any contract or assurance made or executed for the purposes of this Constitution, or for the purposes of any enactment relating to the Government of India heretofore in force, nor shall any person making or executing any such contract or assurance on behalf of any of them be personally liable in respect thereof.

 

 

ARTICLE 300

 

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.

 

 

CHAPTER IV – RIGHT TO PROPERTY (ARTICLE 300A)

 

 

ARTICLE 300A

 

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.

 

DESCRIPTION

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.

 

 

PART XII OF THE CONSTITUTION (ARTICLE 301 – 307)

 

 

TRADE COMMERCE AND INTERCOURSE (ARTICLE 301 – 307)

 

 

ARTICLE 301

 

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.

 

 

ARTICLE 302

 

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.

 

DESCRIPTION

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.

 

 

ARTICLE 303

 

RESTRICTIONS ON THE LEGISLATIVE POWERS OF THE UNION AND STATES WITH REGARD TO TRADE AND COMMERCE

  1. Notwithstanding anything in article 302, neither Parliament nor the Legislature of a state shall have the power to make laws giving preference to one state over another, or discriminating between one state and another, in matters of trade and commerce, related to any of the subjects specified in the 7th Schedule of the Constitution.
  2. Nothing in clause (1) shall prevent Parliament from making any law giving any preference or making any discrimination if it is necessary to do so for dealing with a situation arising from scarcity of goods in any part of the territory of India.

 

 

ARTICLE 304

 

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 –

  1. impose, on goods imported from other states or the Union territories, any tax to which similar goods manufactured or produced in that state are subject, in a manner not to discriminate between goods so imported and goods so manufactured or produced within the state.
  2. impose such reasonable restrictions on the freedom of trade, commerce or intercourse with other states or within that state as may be required in the public interest, provided that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a state without the previous sanction of the President.

 

DESCRIPTION

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.

 

 

KEY FACTS

 

  1. The first Finance Commission was appointed in 1951. Its Chairman was KC Neogy.
  2. The current Finance Commission is the 15th Finance Commission of India, with Nand Kishore Singh as its Chairman.
  3. The Fiscal Responsibility and Budget Management (FRBM) Review Committee report, has suggested a debt to GDP ratio of 60 percent for the general government by 2023, comprising 40 percent for the Central government and 20 percent for the state governments.