Financial relation 1. The Indian Constitution incorporates a very

elaborate scheme of centre state financial relations. Its chief characteristics are :-

•The complete separation of taxing powers between centre and states•Tax sharing between the two •The allocation of funds to the state 2 The tax enumerated in the centre list are

leviable by the centre exclusively.3. The tax enumerated in the state list are

leviable by the state exclusively.

Financial relation One of the cardinal principle is incorporated in in Art.265 “No tax shall be levied or collected except by authority of law.”Taxing statue must comply with the following requirement for validity :-•The law must be within the competence of the concerned legislature and covered by the by the entries in the respective lists of seventh schedule of the constitution. •The law should not be void under Art.13.

Consolidated fund of India and the state Art.266.It includes :- all revenues received by the Govt. of India/ State. All money raised by the govt. of India /state by

the issue of treasury bills, loans or ways and means advances.

All moneys received by the govt/state in repayment of loans.

No money can be appropriated except accordance with law.

The Acts passed for withdrawal of money from the above funds are called the appropriation Acts.

Contingency fund of India :- Art. 267 empowers parliament to establish by law a contingency fund for the union this fund is placed at the disposal of the president by parliament by law. The amount of this fund is determined by parliament ,by law.

Public account :- Art.266(2) the amount of taxes ,duties and other revenues are deposited in the consolidated funds. Other public money received by or on behalf of the appropriate govt. is credited to the public account of union or the state.

Tax:- means burden of charges imposed by the legislature in exercise of its legislative power on person or property to raise money for public purposes.

• The rule which apply to the interpretation of the non- tax entries apply Mutatis Mutandis to the interpretation of tax entries as well.

• Entries 82 to 92 B enumerate the taxes which ,parliament is entitled to levy exclusive.

Taxes on Income other than agricultural income:- entry 82.

income tax is divided between the centre and state .

Centre can levy a tax on non –agriculture income.

Tax on agriculture is assigned to the state. The term income means any profits or gain

which is actually received .therefore a tax on capital gain or pension is permissible.

A loan advance to share holder of a company can be treated as income.

The income Tax Act 1961 is a law made under this entry.

83. Duties of customs including export duties.

84. Duties of excise on tobacco and other goods manufactured or produced in India except—a) alcoholic liquors for human consumption.b) opium, Indian hemp and other narcotic

drugs and narcotics, but including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.

The meaning of excise is that of a tax on articles produce or manufactured in the country.

The SC has define manufacture as follows:- The moment there is transformation into a

new commodity Commercially known as distinct commodity

having its own character ,use ,name Whether be a result of one process or

several processes manufacture take place And liability to exercise duty is attracted.

In empire Industries v. Union of India AIR 1986,the court has ruled that bleaching ,dyeing ,printing and finishing of man made cotton fabric constitute manufacture as commercially a different article is produced after these process from the cloth which under goes these process . Human skills and materials are used in the processing of fabrics.

Example :-• A duty coal raised at the collieries is a

duty of exercise.• a duty of excise can be imposed on

production of rubber.

85 Corporation tax :- is a tax on income payable by companies.

The company paying tax are not authorized to deduct the same from dividends payable by the companies to individuals.

97 any other tax not enumerated in list II & III

Gift tax :- it is not a tax on land or building what is tax is the transmission of title by gift and the value of the land and building is only the measure of the value of the gift.

Service tax levied on services rendered by mandap –keeper was held not to be tax on land under entry 49 II nor a tax on sale and purchase of goods under entry 54 list II but a tax imposed by parliament under its residuary power.

Tax :- tax is a compulsory exaction of money by a public authority for a public purpose to meet the general expenses of the state.

Fee :- is a payment for special services render or some work done for the benefit of those from whom the payment is demanded.

Fees

Some service to be render to the payer of the fee as essential element of the concept of the fee.

Indian Mica & Micantile Industries v. state of Bihar AIR 1971,the court laid down the emphasis on three element:- To be fee the state should render the

services to those from whom the fee is collected.

Theory of quid pro quo

A mere regulation of trade in public interest is no services to person required to pay the levy.

The fee charged is to have a reasonable correlation with the expenses incurred in rendering the services i.e. the levy must be a quid pro quo for the service rendered.

Imposition of charges for supervision, inspection and control of private activity may be regarded as a fee

There are two kinds of fee :-Art. 110(2)199(2)

Fee for licenses Fees for service render.Liberty cinema case.

License fee dose not necessarily mean fee in lieu of services and that no quid pro quo need to established in such case.

Regulatory Fee

Vam organic chemicals ltd v. state of up 1997.the court accepted the notion of fee charged for licenses i.e. regulatory fee the court distinguish between the regulatory fee and compensatory fee .i.e. fees for services render .

Court fees. State of Madras v. Zenith lamps the supreme court ruled that court fees could be levied not for increasing general revenues but to meet the cost of administration of civil justice.

The scheme of allocation of centre –state taxing powers designed with convenience ,simplicity economy and uniformity.

But fails to create an equilibrium between responsibility and resources at the state level.

The state revenue raising capacity is cabined due to many reason:-

The economic condition prevailing within their boundaries.

Centre Financial Equilibrium at the State Level

The fact that they have to share their taxing power with the local govt.

Their taxing powers being some what inelastic.

The constitution 80th Amendment Act 2000

On the recommendation of the 10th finance commission drastic changes have been introduced in the scheme of tax-sharing between the Union and the states.

This amendment has been made applicable from April1 1996 giving retrospective effect.

As per art.268 some taxes are levied by the Union but are collected and appropriated by the states. These are :-

a) Stamp duties listed in the union list. b) Duties of excise on medicinal and toilet

preparations mentioned in the union list . The union govt. has no share in such taxes.

Art.268A has been inserted by the constitution 88th Amendment Act 2003. Service tax is levied by the Union but collected by the central and the state govt.

Service tax or tax on service was levied by the Finance Act 1994 and has now been given constitutional status vide Art. 268A .

Service tax is value added tax (VAT) Entry 92-C of list I Services tax on chartered Accountant ,cost

Accountant and architects etc has been upheld by the Supreme Court .

States power to levy sales taxes (Art.286)

The power to levy taxes on sale or purchase of goods other than news paper belongs to the state. a) No state can impose a tax on sale or

purchase of goods takes place outside the state.

b) States are debar to impose a tax on the sale or purchase of goods which take place in the course of the import or export of the goods ,out of the territory of India.

c) No state can tax a sale or purchase taking place in the course of inter – state trade and commerce.

Art. 258 debars a state from taxing union property unless parliament by law otherwise provides.

Union of India v. state of U.P. AIR 2008 SC 521 Service charge for supply of water and maintenance of sewerage system of railway colonies as provided by the Jal Sanathan, cannot be said to be tax on the property of the union.