After reading this article you will learn about the financial relations between the Centre and the State of India:- 1. Divisions of Powers 2. Distribution of Resources 3. Grants-in Aid 4. Loans.

Divisions of Powers:

The constitution lucidly lists the powers and functions of different layers of government. The seventh schedule of Indian Constitution, on the basis of the financial criteria adopted, contains three lists viz., the union list, the state list and the concurrent list.

The function of the union government include nearly 98 subjects such as defence, automatic energy, foreign affairs, Railways, National Highways, Ma­rine Navigation, Airways, Post and Telegraph, currency and foreign exchange, foreign and interstate trade etc.

The functions of state government include about 70 items like public order, police, admin­istrations of Justice, public health, education, agriculture, forests, fisheries etc. There are about 57 subjects in the concurrent list such as commercial and industrial monopolies, labour disputes, social security etc., where union and state governments together can oper­ate.

Distribution of Resources:


The constitution followed the revenue allocation process in line with the provisions contained in the government of India Act of 1935. Constitution makes clear divisions of fiscal powers between the union and the state governments.

Taxes which have an interstate basis are levied by the union, where as those with a local base are levied by the states. Union government has exclusive powers to impose taxes which are not specifically mentioned in state or con­current list.

The taxes upon which the union government has legislative ju­risdiction can be conveniently classified under the following four fold divisions:

(a) Taxes which are levied collected and wholly retained by the union government. This includes customs duties, corporation tax, tax on capital value of the assets exclusive of agricultural land of individual and companies.


(b) Taxes which are levied and collected by the union, but the pro­ceeds are shared with the states. In this category comes in­come tax other than agricultural income and duties of excise on tobacco and other goods manufactured in India except liquors and narcotic drugs. Union excise duties also fall under this category.

(c) Taxes which are levied and collected by the union, but the entire proceed are given to the states. In this category includes suc­cession and estate duties on properly other than agricultural land, terminal tax, tax on railway fares and freight etc.

(d) Taxes which are levied by the union but collected and appropri­ated by the states. This category includes stamp duties, duties of excise on medicinal and toilet preparations.

Taxes within the jurisdictions of the states are included in the state list. The taxes levied collected and retained by the states in­clude land revenue, taxes on agricultural income, estate duly in re­spect of agricultural land, taxes on consumptions and sale of elec­tricity, taxes on the sale and purchase of goods other than newspapers etc.


Taxes levied by the union but collected and appropriated by the state also includes in state list. As per article 268 of the constitution it includes stamp duties and duties of excise on medici­nal and toilet preparations.

As per Article 269 of the constitution there are taxes levied and collected by the union, but the proceeds are given to the states. Succession duty (other than agricultural land) terminal taxes on goods or passengers carried by sea or air, taxes on railway fares and freights etc. include in this category.

Taxes levied and collected by the union and distributed between the union and the states include taxes on income other than agricul­tural income and union duties of excise.

Grants-in Aid:

Constitution clearly recognizes the facts that tax powers assigned to the states are insufficient to meet their expenditure. Articles 275, clearly specifies that states are in need of additional assistance in the form of grants-in-aid to meet the main fold expenditure of the state governments in the provision of social services and welfare activities.


The grants in aid are primarily given on the basis of needs of the state. Usually it is given to bridge the gap between revenue and expenditure of the states or to remove inter-regional disparities in resources.


Both the central and state governments borrow internally to mobilize resources. Article 292 of the constitution empowers the government of India to borrow upon the security of the Consolidated Fund of India.

Under Article 293, States are empowered to borrow from the union government subject to certain conditions. The state can float loans independently in the capital market, if they have no outstand­ing loan from the central government.