Centre State Relations- Legislative, Administrative, and Financial [UPSC Notes]

Centre State Relations

Centre State Relations in India are fundamental aspect of the country’s federal structure, ensuring a balance of power and responsibilities between the central government and individual state governments. These relations are categorized into three broad spheres: legislative, administrative, and financial. Legislative relations define the law-making powers, administrative relations deal with the distribution of financial resources. These frameworks facilitate cooperation and coordination, ensuring national integrity while accommodating regional diversity.

The Constitution of India establishes a federal state and gives both the Centre and the States the authority to act independently within their respective spheres of jurisdiction.

Concept of Division of Power:

1. The distribution of power between the Centre and the States is known as the division of power.
2. Division of power is different from the separation of powers: The former is about the distribution of powers between the Union and the states (vertical distribution of power), and the latter is about the separation of powers among three organs of government, i.e. legislature, judiciary and executive (Horizontal distribution of power).

In India, the division of powers is specified in the Constitution itself. The relations between the Centre and the states, which constitute the core of federalism, have been enumerated in Parts XI and XII of the Constitution under the following titles:

1. Legislative Relations (Part XI Chapter I)
2. Administrative Relations (Part XI Chapter II)
3. Financial Relations. (Part XII)

Let’s visit each one by one.

1. Legislative Relations Between Centre and State

The legislative relationships between the Centre and the States are outlined in Articles 245 to 255 of Part XI of the Indian Constitution and can be classified into four aspects:

➤ Territorial jurisdiction of Centre Legislation

1. Territorial Legislation: The Parliament can legislate for the whole or any part of the territory of India. The territory of India includes:
   1. States,
   2. Union Territories and
   3. Any other territory that may be acquired in the future.
2. Extra-Territorial Legislation: The Parliament also possess the power of extra-territorial legislation, which will cover Indian resident and their property outside India.

➤ Territorial Jurisdiction of the State Legislature

States, on the other hand, can make laws for the whole or any part of the State.

✦ Limitations on Parliament’s Jurisdiction

• Schedule 5: The application of laws made by Parliament to any scheduled area can be barred or modified by the Governor’s notification.
• Schedule 6: As per Schedule 6, the Governor of Assam may direct that an act of Parliament will not apply to autonomous districts of Assam or will apply with certain modifications and exceptions. Similar power has been granted to the President in matters of autonomous districts of Meghalaya, Tripura and Mizoram.
• Article 240: The President can make regulations regarding the Union territories of Andaman and Nicobar and Lakshadweep. It will have the same force as an act of Parliament; such regulations can also repeal laws made by the Parliament in that relation.

Distribution of Legislative powers (Subjects)

The distribution of the subject list between the Centre and the State has been taken from the Government of India Act 1935. They are as follows:

1. Union List
2. State List
3. Concurrent List

1. Union List

• Currently, the Union List contains 99 (Originally 97) subjects over which the Parliament has exclusive powers.
• These subjects are of national importance and demand uniformity all over India, such as defence, foreign affairs, communication, currency, atomic energy, etc.

2. State List

• The state list comprises 61 (Originally 66) subjects over which states have exclusive powers to make laws.
• These subjects are of local and regional importance, such as police, public order, public health, etc.

3. Concurrent List

1. The Concurrent list consists of 52 (Originally 47) subjects over which both Parliament and the State can make laws.
2. However, in case of conflict between central law and state law, the central law will prevail.
3. Subjects in the concurrent list include Criminal and civil law and procedure, marriage and divorce, labour welfare, electricity, etc.
4. The 42^nd Amendment Act of 1942 transferred 5 state subjects to concurrent subjects:
   • Education
   • Forest
   • Conservation of forest and wild animals
   • Weights and measures
   • Constitution of all courts except high courts and Supreme Court.

Residuary Powers: Residuary subjects are those matters which are not mentioned in the above 3 lists. These powers are vested with the Parliament.

International Practices: The Canadian model closely resembles the Indian model; here, both the union list and state list are mentioned in the Constitution. However, it doesn’t have a concurrent list.

101st Constitutional Amendment Act

This Act made provisions regarding the Goods and Services Act. It provides that Parliament and the state legislature both have the authority to enact laws regarding goods and services tax levied by the Union or by the State. Further, the Parliament alone has the authority to enact laws regarding the goods and services tax where the supply of goods or services occurs during inter-state trade or commerce.

Parliamentary legislation in state matters

Under certain exceptional circumstances, the Parliament is empowered to legislate on the subjects mentioned in the state list.

1. Article 249: If the Rajya Sabha passes a resolution with a special majority in the national interest, the Parliament is empowered to legislate on state subjects. However, such an act will be in operation for a year; it can be extended for one more year.
2. Article 250: This provision empowers the Parliament to make laws on any State List subjects during the national emergency . However, the Parliament’s laws under this provision will cease to operate on the expiration of six months of the emergency. The state legislature’s power to make laws on the same subject is not restricted. However, in case of disagreement between State law and Parliament law, only the Parliament’s law prevails.
3. Article 252: Under this provision, if two or more States’ legislatures request the Union Parliament through a resolution to make a law on a particular subject mentioned in the State List, which is useful for states, the Parliament can legislate on it. However, such an act will only apply to the concerned State.

• • This amounts to the surrender of power by the State to the Parliament on that subject. Several acts were legislated through this route. For example, the Wildlife Protection Act 1972, Water Act 1974, etc.

4. Article 253: This provision empowers the Parliament to make laws for the whole or any part of the country for implementing any international treaty and agreement.
5. Article 356: During the President’s rule , the Parliament is empowered to legislate on state subjects.

Centre’s control over state legislation

Besides Parliament’s power to legislate on State subjects, the Union executive also wields some powers over state legislation.

1. The Governor, under Article 200, is empowered to reserve certain state bills for the consideration of the President. In such matters, the President enjoys absolute veto.
2. Certain legislations can only be introduced in the state legislature with the prior permission of the President. For example, legislation can affect the freedom of trade and commerce.
3. During a Financial emergency (Article 360), the President can direct the states to reserve money bills or any other financial bills for his/her consideration.

Doctrine of Colourable Legislation

The doctrine comes into play when a legislative body is not allowed to legislate in certain areas but does so indirectly through another legislation.  Legislation can be called colourable if its subject matter is outside the competence of the legislative body. ‘Colourable’ here means disguised or camouflaged. The doctrine is based on the proverb, “What cannot be done directly should also not be done indirectly”.  This doctrine is relevant in a federal system, where the legislative boundaries are well defined; for example, Article 246 of the Indian Constitution provides the list of subjects on which the Union and State can make laws.  Doctrine of Pith and Substances: This doctrine helps determine the true nature and character of legislation. The Courts employ this doctrine to identify the purpose and substance of the legislation and then determine whether it falls under the legislative competence of the enacting body.

2. Administrative Relations Between Centre and State

As we know, the Constitution has explicitly delimited the legislative and executive powers of the Union and State. However, the Union government exercises control over the States’ executive powers in several ways as specified in various provisions of the Constitution.

Distribution of Executive Powers

1. According to Article 162, the Union Government’s executive power extends to all the subjects on which Parliament can make laws (Union List) and in matters where rights, authority and jurisdiction have been conferred by treaties or agreements.
2. Similarly, states’ executive rights extend to their territory in the matters mentioned in the State List.
3. In the matters of the concurrent list, the executive power lies with states, except when the Constitution or Union law directs otherwise.

However, Article 256 also provides that every State’s executive power is to be exercised in such a manner as to ensure compliance with the laws made by the Union Parliament.

Centre’s Powers to Issue Directions to State

1. Article 257 empowers the Union to give directives to states in certain matters:
   • Construction and maintenance of “means of communication” of National or Military importance, as declared by the Parliament.
   • Protection of railway infrastructure in the State.
2. Provision of adequate facilities of instruction in the mother tongue in primary education of linguistic minorities. (Article 350A)
3. Formulation and implementation of welfare schemes related to scheduled tribes in the State. (Article 339)

Non-compliance with these directions can invite coercive actions by the Centre under Article 365 and may lead to the President’s rule in the State if the Centre so decides.

Obligations of the state and Union & Centre’s Direction to state

In order to allow the Union to carry out its executive actions without restrictions, the Constitution imposes two obligations on state’s executive powers.

1. General obligation: Article 256 of the Indian Constitution provides that every State’s executive power is to be exercised in such a manner as to ensure compliance with the laws made by the Union Parliament.
2. Specific obligations: Article 257 provides that the executive power of every State will be exercised in a way so that it does not impede or prejudice the exercise of the executive power of the Union.

Centre’s Direction to States

The executive power of the Union shall extend to the giving of such directions to a State as may appear to the Government of India to be necessary for that purpose (Article 257). For example:

1. Construction and maintenance of communication-related to national or military significance.
2. Protection of railway infrastructure in the State.

Centre’s directions to states under other provisions of the Constitution

1. Provision of adequate facilities of instruction in the mother tongue in primary education of linguistic minorities (Article 350A).
2. Formulation and implementation of welfare schemes related to scheduled tribes in the State (Article 339).

The non-compliance with these directions can invite coercive actions by the Centre under Article 365.

Delegation of Executive Powers from Centre to States

The distribution of legislative powers between the Centre and the State is fixed. However, in matters of executive powers, the Constitution allows for the delegation of executive powers from the Centre to states and vice versa to avoid deadlock.

1. As per Article 258 of the Constitution, the President, with the consent of the state government, confer to the states any executive functions of the Centre.
2. Similarly, the Governor of a state, with the consent of the Centre, can delegate the executive power of that State to the Centre.

This mutual delegation of power can be conditional or unconditional.

Inter-state Council and cooperation between Centre and states

The Constitution provides for the following provisions for cooperation and coordination between states.

1. Article 263 empowers the President to appoint an Inter-State Council for the following purposes:
   • to inquire about the disputes that may have arisen between the States;
   • to investigate and discuss subjects in which the States or the Union and States have a common interest; and,
   • make recommendations for better coordination and action in respect of these subjects.

The inter-state Council was established in 1990 on the recommendations of the Sarkaria Commission.

2. Article 262 enables the Parliament to legislate on the matter of adjudication of any dispute regarding the use, control and distribution of inter-state rivers.
3. The public acts, documents, and judicial processes of the Centre and each State should be granted full faith and credit throughout the Indian territory (Article 261).
4. The Parliament may designate an appropriate authority to deal with constitutional provisions relating to inter-state freedom of trade and commerce. No such authority has been appointed so far (Article 307).

Governor’s role

The Governor is the constitutional head of State in India. This post has been a major cause of disagreements between the Union and the states due to various reasons:

• Agent of the Centre:
  1. The Governor functions as an agent of the Union and sends periodic reports to the Centre. Thus, the Centre exercises control over states through the Governor.
  2. States have no role in the appointment of the Governor.
• The Governor also enjoys certain discretionary powers in the following matters:
  1. Invitation to parties and pre-poll coalitions for forming the government after elections. The Governor’s role becomes important in case of a fragmented mandate.
  2. Determining the time for proving a majority in the legislative assembly.
  3. Giving assent to bills or reserving them for the President’s consideration.

Centre’s control over key Administrative posts:

All India Services

Both states and the Centre have their own public service commissions. In addition, there are All India services like IAS, IPS and IFoS. The members of these services hold key posts and positions in both Centre and State.

The ultimate control over these services rests with the Centre; states have very limited power. And therefore, these services are perceived as anti-federal.

However, they are significant for performing the following functions:

1. Ensure high standards of administration;
2. Ensure uniformity in administration throughout the country;
3. Facilitate coordination, cooperation and joint action on matters of common interests between the Centre and states.
4. They are also a symbol of national integration; members belonging to different states serve all over the country.

Defending this provision, Dr BR Ambedkar argued that there are some services that are strategic from the point of view of maintaining standards of administration. The All India services ensure uniform qualification, training, and pay scale to its members.

Public Service Commissions

These institutions are responsible for the recruitment of key posts in the State’s administration.

1. The chairman of Public service commissions is appointed by the Governor of the State; however, only the President has the authority to remove him/her.
2. The Parliament can establish a Joint Public Service Commission for two or more states.

State Election Commission

The local body elections are carried out by the State Election Commission. The state election commissioner, though appointed by the Governor, can be dismissed only by the President.

Duties of the Centre under Article 355

This provision of the Constitution imposes two duties on the Centre:

1. To safeguard every State against external aggression and internal disturbances.
2. To ensure that state governments are being carried out in accordance with the provisions of the Constitution.

Extra-Constitutional Instruments

Besides Constitutional provisions, there are several extra-constitutional bodies that facilitate coordination and cooperation between the Union and states and between states,

1. Such bodies include Niti Ayog (successor of the Planning Commission), the Central Council of Health and Family Welfare, the National Integration Council, the Central Council of Indian Medicine, the University Grant Commission, the Central Council of Local Government, Zonal Councils, the North-Eastern Council etc.
2. There are several conferences as well, such as the Governor’s Conference (Presided over by the President, The Chief Minister’s Conference (Presided over by the Prime Minister), the Chief Secretaries’ Conference (Presided over by the Cabinet Secretary), the Chef Justice’s Conference (Presided over by the Chief Justice of India), similarly there are Home Minister’s conference, Law minister conference, the Conference of Inspector General of Police conference etc.

NITI Ayog

The NITI (National Institution for Transforming India) Ayog was set up to replace the erstwhile Planning Commission. It is a non-constitutional and non-statutory body. It is headed by the Prime Minister of India, and its governing Council includes the Chief Ministers of all states.  It aims to evolve a vision of national development priorities and strategies with the active participation of states.  It promotes cooperative-competitive federalism by involving states in the preparation of economic policies and by promoting healthy development between states on various socio-economic and administrative indicators. Compared to its predecessor, it is less intrusive in matters related to states, as its mandate, unlike the Planning Commission, does not involve allocating funds and imposing policies on states.

3. Financial Relations Between Centre and State

The financial autonomy of states is an essential element of the federal scheme in the Indian Constitution. The financial relations between the states and the Centre has been provided in Article 268 to 293 of the Constitution.

Allocation of Taxation Powers

The Constitution allocates the taxing powers between states and the Union in the following manner, according to Article 246:

1.    Taxes belonging to Union exclusively:

• The Parliament has exclusive authority to levy taxes on subjects mentioned in the Union List (13 in number). Income tax (non-agricultural Income), Customs tax, Capital gains Tax, corporation tax, CGST, etc.
• Further, under Article 246A, the Centre has exclusive power to make laws on inter-state commerce of goods and services.

Thus, the most revenue-generating taxes, such as corporate tax, Income tax, and a portion of GST, go to the Union. This makes the Union government fiscally much stronger than the State governments.

2.    Taxes belonging to States exclusively:

The State legislature has exclusive authority to levy taxes on the subjects in the State List (18 in number). These are as follows:

1. Land Revenue;
2. Taxes on agricultural income;
3. Taxes on land and buildings;
4. Taxes on minerals;
5. Excise duty on alcohol for human consumption;
6. VAT (value-added tax on Petroleum, natural gas, aviation turbine fuel;
7. Tax on consumption and sale of electricity
8. Entertainment tax;
9. Fee on matters mentioned in State List (except court fee).

3.    Areas where both Union and State governments can levy taxes

These are referred to in the Concurrent List (No subjects). Further, the 101^st Amendment has conferred concurrent powers to states and the Centre in matters of Goods and Services Tax (except in the case of interstate GST, for which laws are made exclusively by the Centre).

4.    Residuary Power of Taxation

The residuary power of taxation rests with Parliament only. Under this provision, the government has imposed gift tax, wealth tax and expenditure tax.

101st Constitutional Amendment

Before the enactment of the 101st Constitution Amendment Act, 2016 and the introduction of Goods and Services Tax, taxation powers were divided between the Centre and States. The Goods and Services Tax replaced various Central and State taxes such as excise duty, service tax, sales tax, entry tax, entertainment tax, etc. It established a uniform tax structure throughout the country to create a common national market for goods and services. It conferred concurrent powers to the states and Centre to impose taxes on Goods and Services. Based on the recommendations of the GST council, states levy the SGST, and Centre levies the IGST and CGST, respectively.

Restrictions imposed on taxation powers of the States:

1. Taxes on occupations, trades, callings, and professions may be enacted by state legislatures, subject to a maximum limit of ₹ 2,500.
2. A state legislature is not allowed to levy a tax on the supply of goods or services in the following circumstances;
   • When the supply occurs outside the State and
   • When the supply occurs during import or export.
3. A state legislature can levy a tax on any water or electricity generated, stored, consumed, distributed or sold by any authority set up by Parliament for regulation and development of any inter-state river or river valley. But, such a law must be submitted for the President’s consideration and receive his assent.
4. States are not allowed to impose taxes on the purchase or use of electricity that is either

• used by the Centre or sold to the Centre;
• used in the construction, upkeep, or operation of the railway by the Centre or by the concerned railway company; or
• Sold to the Centre or the concerned railway company for the same purpose.

Difference between Tax ‘Levied’, ‘Collected’ and ‘Appropriated’

The Constitution distinguishes between the power to levy, collect and appropriate tax. 1.    “Tax Levied” by states means the liability of the taxpayer is towards the states (not the Centre). 2.    “Tax collected” by states means the authority that uses its administrative machinery to collect the tax is the State (not the Centre). 3.    “Tax appropriated” by the states means the collected amount is to join the state coffer. This distinction is important because some taxes are collected by the Centre but appropriated by both states and the Centre. For example, Income Tax is levied and collected by the Centre but is appropriated by both the Centre and the State, i.e. the proceeds are shared between the Centre and states.

Tax Provisions for Uniformity of Taxation throughout India

Certain taxes in India are shared with the States, but states have little or no say in determining the tax rates. These provisions are made so that there is a uniformity of Tax structure throughout India.

1. Duties levied by the Union but collected and appropriated by the States (Article 268): This category consists of stamp duties on bills of exchange, cheques, promissory notes, insurance policies, share transfers, etc. The proceeds of these duties levied within any state are assigned to that State.
2. Taxes levied and collected by the Union but allocated to the States (Article 269):

• • There are taxes on the sale or purchase of goods/consignments (apart from newspapers) in the course of inter-state trade or commerce. Items like tax on railway fares and freight fall under this category.
  • They are allocated to the concerned states under the principles established by the Parliament.

3. Levy and collection of Goods and Services Tax with respect to Inter-State Trade or Commerce (Article 269-A): The Goods and Services Tax on supplies in the course of inter-state trade are levied and collected by the Centre. However, this tax is distributed between the Centre and the States in accordance with the rules set forth by Parliament based on the GST Council’s recommendations.
4. Surcharge on Certain Taxes and Duties for Purposes of the Union (Article 271): The Parliament has the authority to impose the surcharges on the taxes and duties indicated in Articles 269 and 270 (above) at any time.
   • The proceeds of such surcharges go to the Union exclusively. In other words, the states do not receive a share in these surcharges. However, the Goods and Services Tax is exempted from this surcharge. In other words, this surcharge cannot be imposed on the GST.

Distribution of Tax Revenue

As we have understood from the above discussion that the Centre is fiscally much stronger than the states, the constitution makers felt a need that the Union must be constitutionally mandated to share a portion of its tax revenue with the states under Article 270.

Article 270 states that all Taxes and duties collected by the Union on the items given in the Union List and the IGST (Article 246A) will form a part of a “Net Proceeds” of taxes, a percentage of which should be shared with the States.

However, there are following exceptions which will not form a part of “Net Proceeds”:

1. Duties and taxes that are mandated to be appropriated by the states under Articles 268 and 269.
2. Surcharge on taxes and duties mentioned in Article 271 (mentioned below); and
3. Any cess levied for specific purposes.
4. Further, Duties and taxes collected as Inter-state Goods and services tax under 269-A are to be first shared with the State as per the recommendation of the GST Council. (IGST is currently shared half by the Centre and the State.) The remaining amount will become a part of the “Net Proceeds”.

The Finance Commission will recommend the percentage of the “Net Proceed” of taxes that should be shared with the states. This is, therefore, also known as the Divisible pool of taxes. Currently, 41% of the “Net Proceeds” of taxes go to the states, according to the 15^th Finance Commission formula.

The rest of the amount will then form a part of the Consolidated Fund of India. This is the amount on which the Union government can then have complete control.

80th Constitutional Amendment, 2000

On the recommendation of the 10th Finance Commission, corporate tax and customs duty were included in the divisible pool.

Shrinking Share of States in Divisible Pool

In recent times, the chief ministers of states have been complaining about dwindling state revenues due to the shrinking of the Centre’s divisible pool. Reason: The Centre has been raising its revenue by levying new cesses and surcharges and increasing rates of existing cesses. Cess and surcharges are intended for specific purposes and do not form a part of a Divisible pool of taxes. As a result, per the report of the 15th Finance Commission, the Centre’s share in total resources raised by the Centre and states is 62.7%. Source: 15th Finance Commission report & Rajya Sabha Question no.136 (2022).

Distribution of Non-Tax revenue

Non-tax revenue comes from the profit from government companies/assets, the sale of government assets(privatisation), and interest income on loans given by the Centre.

Centre: The majority of the Centre’s non-tax revenue comes from:

1. Banking;
2. Post and Telegraph;
3. Railways;
4. Coinage and Currency;
5. Broadcasting;
6. Public sector enterprises;
7. Escheat and Lapses: escheat refers to unclaimed property, and lapse refers to termination of rights due to failure to meet certain conditions.

States: The receipts from the following makes the bulk of the State’s non-tax revenues:

1. Irrigation;
2. Fisheries;
3. Forests;
4. State Public enterprises;
5. Escheat and Lapse.

Grant-in-Aid to the States

Besides sharing in tax revenues, the Centre also provides grants-in-aid to the needy states. There are two types of grants:

1. Statutory Grant: These are the grants given by law to the States, i.e. there is a statutory obligation upon the Centre, and therefore known as Statutory Grants. Article 275 empowers the Parliament to provide statutory grants to states in need.
   • These grants are provided on the recommendation of the Finance Commission.
   • The amount is charged annually to the consolidated fund of India.
   • Apart from general provisions, the Constitution also provides for specific grants for the welfare of scheduled tribes and for enhancing the level of administration in scheduled areas.
2. Discretionary Grants: These are the grants given by the government without passing through the legislature, i.e. the Centre is not under any obligation to provide such grants. Article 282 empowers both the Centre and the State to provide grants for any public purposes. These grants serve two purposes:
3. To provide the State with financial support to meet plan objectives;
4. To provide the Centre with some leverage to influence and coordinate state action to put the national plan into action (reforms in the electricity sector).

Goods and Services Tax Council

The GST Council was established by the 101^st Constitutional Amendment under Article 279A to facilitate smooth coordination, cooperation and consultation processes between the Centre and the States. The Council is required to make recommendations on the following matters:

1. The taxes, cesses and surcharges imposed by the Centre, the States and the local bodies which would get subsumed in GST.
2. Whether a good or service should be included in the GST.
3. Model GST Laws, principles of levy, allocation of GST levied on supplies during inter-state trade and the principles that govern the place of supply.
4. The minimum turnover limit below which goods and services are exempt from GST.
5. Determination of GST rates on goods and services and bands of GST.
6. Any special rate or rates for a certain period to raise additional resources during a crisis or natural disaster.

Finance Commission

The Constitution of India, under Article 280, provides for the establishment of a Finance Commission. It is constituted by the President, usually every fifth year. The Commission is required to make a recommendation to the President on the following matters:

1. The vertical and horizontal distribution of the net proceeds of taxes to be distributed between the Centre and the states. Vertical distribution includes the amount of net proceeds of taxes that go from the Centre to states. The Horizontal distribution includes allocation between states and the respective share of such proceeds.
2. The principles which should govern the grants-in-aid allocation to the states by the Centre.
3. The measures required to augment the consolidated fund of a state to supplement the resources of the local bodies in the State on the basis of recommendations of the State Finance Commission.
4. Any other matter referred to it by the President in the interests of prudent finance.

Note: Net proceeds means total proceeds minus the cost of collection. It is certified by the Comptroller and Auditor General of India.

Constitutional protection of the State’s financial interests

For the protection of the financial interests of states, the Constitution has provided that certain bills cannot be introduced in the Parliament without the prior recommendation of the President:

1. A bill that imposes or alters any tax which is concerned with the State;
2. A bill that alters the meaning of ‘Agriculture Tax’;
3. A bill that seeks to alter the principles on which money is distributed to the states.
4. A bill that seeks to impose any surcharge on any stipulated tax or duty for the purpose of the Centre.

Borrowing Powers

The Constitution has made the following provisions regarding the borrowing powers of the Centre and states:

1. The central government is empowered to borrow from both inside India and outside India. It can also give guarantees. However, these are subject to the limit fixed by the Parliament. So far, no such law has been passed by the Parliament.
2. The state government can borrow only within India on the security of the consolidated fund of states. It can also provide guarantees. However, these are subject to limits fixed by the state legislature. In recent times, the central government has allowed some states to borrow directly from external bilateral agencies, subject to certain conditions and restrictions.
3. The Central government can provide debt to any state or give guarantees for loans raised by any state. Any amount required for the purpose of making such loans is to be charged to the Consolidated Fund of India.
4. A state cannot raise any debt without the consent of the Centre in case of outstanding loans owed to the Centre or outstanding loans on which the Centre has provided a guarantee.

Immunity from mutual taxation

The Indian Constitution makes the following provisions to avoid mutual taxation:

1. Exemption of central property from state taxation
   • The property of the central government is exempted from all taxes levied by a state or any authority (Municipalities, district boards, etc.) within the State. However, the Parliament is empowered to remove this ban.
   • However, the corporations and companies created by the central government are not immune from state or local taxation.
2. Exemption of state property from central taxation

• • The state property or income is exempt from centre taxation, either derived from sovereign functions or commercial functions. However, the Parliament can provide for the taxation of commercial functions.
  • However, the property and income of local authorities within the State are not exempt from the Centre’s taxation.
  • Similarly, the state enterprises can be taxed by the Centre.

Note: Here, the word ‘property’ includes Buildings, lands, chattels, shares, debts, etc.

Supreme Court, in an advisory opinion in 1963, ruled that the State’s immunity in matters of Centre’s taxation does not extend to excise duty and customs duty. It essentially means that the states cannot manufacture or import whatever they want without paying tax to the Centre. The Centre can levy tax in such matters.

Effect of Emergency on Centre-State Relations

Typically, the centre-state relations are supposed to function as per the federal scheme formulated by the Constitution. However, in exceptional circumstances, the Constitution provides for the proclamation of emergency during which the government is practically carried on unilaterally.

There are 3 kinds of emergencies; the first, under Article 356, relates to the failure of constitutional machinery in a state (also known as President’s Rule); the other two are National Emergency (Article 352) and Financial Emergency (Article 360).

1. Effect on Legislative Powers

1. National Emergency (Article 352):
   • During the operation of a National emergency, the Parliament is empowered to legislate on state subjects. Such law remains operative till the expiration of 6 months after the emergency ceases to operate.
   • However, during National Emergency, the State’s power to legislate remains intact unless there is a conflict between the Centre’s law and the State’s law, in which case the former will prevail.
2. President’s Rule (Article 356): During the proclamation of the President’s Rule in a State, the President can assume the Parliament is empowered to legislate on subjects mentioned in the state list. Such laws continue to be valid even after the termination of the President’s rule.
3. Financial emergency (Article 360): During the financial emergency, the President can direct the states to reserve money bills or any other financial bills for his/her consideration.

2. Effect on Administrative Powers

1. National Emergency (Article 352): During the operation of a National emergency, the union government becomes empowered to give executive directions to a state on ‘any’ matter. Though they are not suspended, the state governments are brought under the total power of the union government.
2. President’s Rule (Article 356): When the President’s Rule is imposed in a state, the President is authorised to carry out all of the Governor’s duties as well as those of any other executive authority in the State.
3. Financial Emergency (Article 360): During the operation of a financial emergency, the Centre can direct the states to observe rules of financial propriety and can give other required directives, such as reducing the salaries of persons serving in the State.

3. Effect on Financial Powers

1. National Emergency: The President can alter the constitutional scheme of the distribution of revenues between the Centre and the states. It means that the President has the authority to either reduce or cancel the transfer of funds (both tax shares and grants-in-aid) from the Union to the states. Such alteration continues till the end of the financial year, in which the emergency ends.
2. Financial Emergency: The Centre can give the following directions to the states:
   • To observe the specified rules of financial propriety;
   • To reduce the salaries and allowances of all classes of state employees;
   • To reserve all money bills and other financial bills for the President’s consideration.

Conclusion

In this article, we have seen the relation between the Union and the State governments in the Indian Union. It is clear from the above discussion that these powers are skewed heavily in favors of the Union government. This asymmetry of power creates a few problems that we shall discuss in “Reforms in Centre-State relations” article, along with the reforms that are slated to improve the health of the Indian federation.

Centre State Relations in India play a crucial role in maintaining the equilibrium between national unity and regional autonomy. The legislative, administrative, and financial dimensions of these relations are crucial for effective governance, enabling both the center and the states to operate within their designated domains while working collaboratively for the country’s development.

Explore additional significant articles on Indian Constitution listed in the table below:

What is a Constitution?	Evolution of Indian Constitution
The Crown Rule	Features of Indian Constitution
The Making of the Constitution	Sources of the Indian Constitution
The Preamble of Indian Constitution	Union and Its territory
Citizenship	Fundamental Rights
DPSP	Fundamental Duties
Amendment of the Indian Constitution	The Doctrine of Basic Structure
Parliamentary System	Federal System
Inter State Relations	Reforms in Centre State Relations
Emergency Provisions	Polity