CENTRE-STATE FINANCIAL RELATION

The constitution of India has made detailed provisions related to tax distribution and the non-tax revenues, the borrowing power and the provisions being supplemented for the grants to respective states by the union. It implies that the parliament has complete power to impose taxes on subjects summarised in the list of centre as well as the state. State legislature has absolute power to charge taxes on subjects specified in the list of states. The tax revenue is distributed by the centre and state individually which signifies that service taxes are imposed by the centre and are collected and detained by both states and centres.

Centre-State financial relation: Explanation

Centre- State relations need to be strong when finance is concerned because maintaining a strong relationship will help in the financial stability of the Central government as well as its respective States. The financial relation states the distribution of various taxes and the allocation of cost spending to each State by setting up a limit and granting access to these cost spending. It implies the power of Centre on the State government in providing access, which assists in minimising the cost spending and maximising the revenue generation through the tax charged on the object. It further signifies that the State is dependent on the Centre for the financial development because the revenue generation of the State is on the financial commission basis. It states the collection of taxes and distribution to the respective States is done following the law being stated in the government. The taxes are being collected by the Central government and need to be expropriated to the State. Since most of the states are having less income, the Centre provides grants which aid the respective states to scuttle their development and administrative expenses. 

State-Centre financial relation: Categorization

Relations uniting State and Centre can be categorised into various categories namely financial emergency and financial commission. The Finance Commission plays a crucial role in maintaining the financial relations of the Centre with the State. It signifies that the President is responsible to make recommendations every five years regarding the allocation and distribution of taxes between State and Centre. It further signifies that the commission should suggest specific principles on the revenues being granted to the State out of integrated funds. Financial emergency ascertains the power to the Central government over the State government to observe specific standards of financial propriety. It also directs the government to minimise the allowance and the salaries of judges and employees which aids in maintaining a healthy financial relationship uniting the State and Centre. 

Centre-State Relation: Financial control

The central government has effective control over State government which can further be exercised by informal means which includes:

• Control over the expenditure and income implies that the Central government might be competent to determine which taxes the State government has access to as well as to determine the forms of diplomatic transfers. In case of expenditure, the Centres might seek to supervise the State’s access to borrowing funds for capital purposes.
• Control on administrative regulation states the ways by which the state services and functions are provided by the Centres which enables the Centre to effectively manage the State’s administrative regulation.
• Control over State’s access implies that the access granted to the State government influences the process of decision making individually and collectively through which the Centre is able to make use of the access. 

Conclusion 

Financial relations between State and Central government are based on the taxes being levied on specific objects and the distribution of taxes by the Central government to the State government. It concludes that the taxes charged on the specific subjects are the source of revenue for the Central government and the commission based on that revenue acts as a source for the State government. It further concludes that the Central government set up a limit in the cost expenditure for the State government in order to maintain an effective cost structure.