The five main aspects of fiscals federalism are as follows:
(1) Division of Functions:
The fiscal powers and functional responsibilities in India have been divided between the Central and State government following the principles of federal finance. The division of functions is specified in the Seventh Schedule of the Constitution in three lists vis. the Union List, the State List and the Concurrent List.
The Union List contains 97 subjects of national importance, such as defence, railways, national highways, navigation, atomic energy, and posts and telegraphs. 66 items of State and local interest, such as law and order, public health, agriculture, irrigation, power, rural and community development, etc. have been entrusted to the State governments.
47 items such as industrial and commercial monopolies, economic and social planning, labour welfare and justice, etc. have been enumerated in the Concurrent List. The concurrent list is one in which both state and the centre can make legislations. However, in case of a conflict or tie, federal laws prevail.
(2) Revenue Powers of the Center:
The Central government has been given powers in respect of taxes on income other than agricultural income, customs duties, and. excise duties on tobacco and other goods manufactured or produced in India, corporation, tax, taxes on capital values, estate duty in respect of property other than agricultural land, terminal taxes on goods or railway passengers carried by railway, sea or air, taxes other than stamp duties on transactions in stock exchanges and futures, markets, stamps duty in respect of land, etc.; taxes on sale or purchase of news papers and on advertisements published therein; and sale, purchase and consignment of goods involving inter-State trade or commerce. In fact, the Central government does not get revenue from all the above taxes.
These revenues can be divided into four categories on the basis of levy, administration and the accrual of revenue as follows:
(a) Taxes that are levied collected and retained by the Central government: e.g. Corporation Tax, Customs Duties;
(b) Taxes that are levied and collected by the Centre but shared with the states: e.g. the net proceeds from Union Excise Duties under Article 270 and the net proceeds from Union Excise Duties under Article 272, respectively;
(c) Taxes that are levied and collected by the centre but whose net proceeds are assigned to the states: e.g. all the eight items under Article 269 of the constitution such as Estate duty. Taxes on Railway Passenger Fares and Freights and Consignment Tax, etc.; and
(c) Tax levied by the Centre but allocated and appropriated by states, such as exercise duties on medicinal and toilet preparations, etc.
(3) Revenue Powers of the State:
The State governments have been given exclusive tax powers in respect of land revenue; taxes on agricultural income; duties in respect of succession to agricultural land; estate duty in respect of agricultural land; taxes on land and buildings; excise duties on goods containing alcoholic liquors for human consumption; opium, Indian hemp and other narcotic drugs; taxes on the entry of goods into local areas; taxes on the sale or purchase of goods other than newspapers; taxes on vehicles, tolls; taxes on professions, trades, callings and employment; capitation taxes, taxes on luxuries including taxes on entertainment, amusements, betting and gambling.
(4) Division of Borrowing Powers:
The borrowing powers have also been clearly mentioned in the Constitution. Under Article 292, the central government is empowered to borrow funds from within and outside the country as per the limits imposed by the Parliament. According to Article 293(3), the States can borrow funds within the Country. Article 293(2) empowers the Centre to provide loans to State subject to conditions laid down by Parliament.
(5) Fiscal Imbalances in India:
The Constitutional fiscal arrangement shows that fiscal imbalances were deemed inevitable as most of the powers for elastic taxes are given to the Central government. Further, the division of powers and functions itself leads to vertical federal fiscal imbalance while the differences in the endowment position of natural resources across States cause horizontal federal fiscal imbalance.
Visualising the fiscal imbalances, the Constitutional makers provided a mechanism of fiscal adjustment by way of fiscal transfers from the Central to the State Governments. This provision in the Constitution was made under Article 280 by way of setting up of a Finance Commission for every five years or earlier, if the President of India feels it necessary.
India has a Federal form of Government (rather quasi-federal). Therefore, the system of indirect taxation which is followed is also federal in nature. Sales Tax can be considered as one of the most important sources of revenue for the states in India. In India, the Constitution has conferred the states with some power on Sales Tax. Through the Constitutional Amendment in 1956, states were given the authority to impose Sales Tax. The Central Sales Tax Act was enacted in 1956 under the Sixth Constitutional Amendment, which gave the Parliament the power to impose a tax on purchase or sale of goods in the course of inter-state trade and commerce.
The revenue generated from this tax was to go to the States. This was done by amending Article 269 of the Constitution. Therefore, sale within the State is regulated by the state Governments and sale outside the State is governed by the Central Government. Accordingly, the Central Sales Tax is levied on purchase or sale of goods in the course of inter-state trade and commerce. Now the important point, the power to levy this tax is with the State Governments. Also, revenue from this tax is assigned to the States.
Fiscal Federalism in India
Fiscal Federalism refers to the division of responsibilities with regards to public expenditure and taxation between the different levels of the government. Having a Fiscal Federalism mechanism allows the government to optimize their costs on economies of scale, because in this manner, people will get public service which they prefer, and there will be no unnecessary expenditure. From the economic point of view also, having a federalized structure helps as it creates a unified market.
Article 246 of the Constitution lays down the list of subjects on which different levels of government can make laws. There are three lists mentioned under Article 246. The Union can make laws relating to the subject matter given under list I. The Sates has the authority to make laws relating to subjects given under list II, and list III, also known as the Concurrent List, allows both the Union and the States to make laws, relating to subjects provided by the list.
These three lists also include taxation as a subject matter. The Union List (I) includes taxes like Customs and Excise duties, Corporation Tax, taxes on income other that agricultural income, etc. List II includes taxes like taxes on vehicles, taxes on liquors, land revenue, taxes on stamp duties, taxes on entertainment and luxuries, taxes on sale or purchase of goods, etc. (List III, or the Concurrent List does not contain any major tax as such)
The Constitution has provided provisions which enable the Union and the States to work in coordination and to levy and collect these taxes through systematic arrangements, for instance, provisions like-
- Taxes levied and collected by the Centre but assigned to the States.
- Taxes levied by the Centre but collected and kept by the States.
- Sharing of proceeds of income from some taxes.
- Grant-in-aid provided by the Centre to the States.
- Grants provided for any public purpose.
Therefore, by dividing the powers of levying and collecting tax between the Centre and the state, the Constitution has allowed the States to share the resources which are accumulated by the Centre. Any amendment of the list through which the States and the Centre derive their power of regulating the taxation system is governed by Article 368 of the Constitution. These amendments require the consent of at least half of the State Legislatures. But if any provision of Part XII of the Constitution is to be amended it can be done by invoking Article 368 (2) which requires the assent of only 50 % members of each House of the Parliament, and therefore, the share which the States are entitled to can be altered by the Parliament.
When administrative convenience and national policy is looked into, they require that some elastic taxes are assigned to the Central Government, but the nature of these considerations is such that these are regulated by the States.
Sales Taxation in India
Sales Tax is one of the primary sources of revenue for the States in India. Sales Tax can be defined as a tax on sales of goods, and the liability arises when the goods or the commodity is sold for the first time. If a product is sold subsequently, without being subjected to any process, then it is exempted from Sales Tax.
According to the definition given by John Due, Sales Tax is a levy imposed upon sales or element which is incidental to sales, such as any receipts from them. The burden of the tax is shifted upon the shoulders of the consumers, and the seller is considered only as a collecting agent of the tax.
Sales Tax can be categorized into three classes-
- Single Stage Tax- This tax is applied to the commodity only once in the entire channel of production and distribution.
- Multiple Stage Tax- This kind of tax apply at all the levels in the production-distribution channel.
- Value Added Tax (VAT) – VAT possesses the characteristics of both, Single Level Tax and Multiple Level Tax. This is because, VAT involves multiplication of the tax rate, but the overall distribution is same as a Single Stage Tax.
The Central Sales Tax Act, 1966 governs the levy of Sales Tax in India. The Act applies to the whole of India. The main objectives of this Act are:
- Formulation of principle for determining when purchase or sale takes place in the course of inter-state commerce, intra-state commerce, and in cases of export and import of goods.
- Declaration of certain goods as special goods for the purpose of inter-state trade and commerce.
- To provide a procedure for the levy, collection and distribution of tax on the sale of goods.
- Specifying conditions and restrictions on state laws which impose a tax on sale or purchase of special goods.
A sales tax within the range of 4% to 15% is levied on all inter-state sales. Services and exports are exempted from sales tax. Sales tax is levied on the seller, but it is recovered from the customer.
Tax Federalism and Central Sales Tax
The Central Sales Tax Act was introduced in the year 1956, and it authorized the Parliament to levy taxes on sale or purchase of foods (other than newspapers) In the course of inter-state commerce. Thus, the Centre had the power to levy taxes in case of inter-state trade and commerce. However the States were granted the authority to levy the CST, and the amount of revenue procured from the levy of CST was also assigned to the States.
Section 15 of the CST Act puts certain restrictions on the power of the states with regards to the levy of a tax on “special goods” or goods which have been declared having special importance in that particular area. Apart from this, since 1975, the Union Government has also entered into an agreement with a few states to abolish levy of sales tax on goods like sugar, tobacco, and textile.
In furtherance of the agreement, an additional Excise Duty is levied by the Union Government of these three commodities instead of Sales Tax.
Division of Taxing Power
Under Article 246 of our Constitution, it is mentioned in Part XII there are some taxes which are completely under the purview of the Union Government, but can be divided between the Centre and the States under this Article. The various procedures for framing the Rules under CST can be categorized under three heads-
- Rules framed by the State Governments.
- Rules framed by the Central Government.
- Rules which are given under the State Sales Tax Act of each State.
As stated above, it may be noted that, although the Union levies the Sales Tax, it is administered by the States.
- Section 13 (1) of the CST authorizes the Central Government to make certain Rules.
- Section 13 (3) confers the power upon the State Governments to make certain Rules, but these Rules shouldn’t be in contravention to the Rules made by the Central Government, or the CST Act as a whole.
- Section 9 (2) states that if in any State, there are no General Sales Tax law is in force, then the Central Government has the authority to govern the matters relating to sales tax or any other matter provided under the CST Act.
Originally, inter-state trade and commerce were included under Article 269 of the Constitution, and the power to administer the taxation and retain the revenue was delegated to the origin States. The original provision was based on “destination” principle, but the Constitutional amendment under the CST Act displaced this rule, making way for exportation.
Sometimes some goods are not subjected to the CST, but some special excise duty may be levied on them by the Union Government. Also, it is very important to determine whether the sale of goods has taken place within or outside the State because CST is applicable only on inter-state trade or commerce. In the case of intra-state trade and commerce, the State Sales Tax Law applies. Section 9 (1) of the CST Act states that the tax will be levied by the Union but collected and retained by the state in which the movement of the goods or the commodities have begun.
Procedure for Imposition of Sales Tax
Under the CST Act, Section 6 is the charging section, i.e. it puts a liability on the seller to pay sales tax on the sale of all goods (other than the sale of electrical energy) in the course of inter-state sales. Goods and Services which fall under the CST Act have been divided into different categories and sales tax is levied according to the category of the good.
The tax is levied on a single point, but in several states assesses have been divided into different categories like the dealer, manufacturer, agent, etc. and the tax is levied on the basic of the category to which the assessee belongs. A quarter returns of sales or purchases are insisted upon, and the assessee is required to furnish the return in the prescribed form.