Income Tax is in the ambit of central legislation, but agricultural Income Tax is a subject of States jurisdiction. The tax legislation has no concurrent Sphere. The power to tax sales taking place in course of inter-state trade is within the power of centre. Sales Tax is levied exclusively by the states.
List of Taxes Levied by Centre and States:
Taxes belonging to Union:
3. Taxes on capital gains.
4. Income Tax and surcharge on I.T.
5. Fees in matter of Union List.
Taxes levied by states:
1. Land Revenue.
2. Stamp Duty.
3. Succession Duty, Estate Duty, Agricultural Income Tax.
4. Taxes on carriage of Passenger in Inland Waterways.
5. Taxes on land & buildings.
6. Taxes on animal, vehicles, advertisements.
7. Entry Tax
8. Sales Tax
10. Profession Tax,
Tax levied by Centre but Appropriated by States:
1. Stamp duties on Bills of Exchange
2. Excise Duties on medicinal and toilet preparations containing alcohol.
Taxes levied and collected by union and distributed between union and the states:
1. Income Tax other than agriculture Income Tax
2. Duties of excise are in the Union List.
Taxes Levied by Centre but assigned to State:
1. Succession Duties on Property.
2. Terminal Taxes on goods or passengers carried by Railways and airways.
3. Taxes on stock Exchanges.
4. Taxes on Advertisement in Newspaper.
The union government can earn revenue from following sources:
(b) Post & Telegraph
(e) Incomes of Central Undertakings.
States have revenue from Forest, Irrigation, and Commercial Enterprises of State Government. When redistributive share of central taxes and state revenues are not adequate enough to meet the expenditure there is provision for grants-in-aid for promotion of welfare activities.
The constitution provides for establishment of Finance Commission to provide and set norms of division of taxes between centre and states. The commission also makes recommendations for grants- in-aid out of Consolidated Fund of India.
The first Finance commission was established in 1951. The first finance commission recommended devolution of 55 per cent Income Tax to States. Fifth Finance Commission increased this amount to 75 per cent. There has been eleven Finance commissions so far completed their work and made series of recommendations. The 12th Finance commission was at work during 2003-2004.
A general criticism is raised against the Finance Commissions from time to time. They feel temporary resource gaps do not provide permanent solutions to the problems of inadequate resources of the states.
The Seventh and Eight Finance commission recommended greater devolution of resources for the states. The seventh Finance commission recommended share of Income Tax to states to be raised to 85 percent. The excise duty share was raised to 40 percent and the 8th Finance Commission raised this amount up to 85%.
The EFC stressed the need for more fiscal discipline and increased share under the criteria distance of per capita Income of the state from that of the state having highest per capita income from 60% to 62.5%.
This measure would help financially weaker states. The EFC tried to ensure an equity and economic justice. States like West Bengal, M.P, U.P, and Bihar got 51.3% of total distributable shares. These states account for 44 per cent of India’s population.
It has been alleged by many quarters that the distribution pattern does not address to the real needs of the states. The entire exercise is archaic and one needs a total review of the entire exercise towards this end.
In August 2000, the constitution was amended, through which vertical tax sharing from centre to states has undergone a major change. Prior to this amendment only Income Tax and Union excise duties were shareable.
The other duties corporate Income Tax and Customs were not at all shareable. According to new norms all taxes are shareable and 29 percent of the pool of central taxes is to be shared with the states.
Transfer from central pool to states has not been adequate in spite of finance commission’s recommendations. There were also Sarkaria Commission’s recommendations to bring corporate Tax under the divisible pool. 8th Finance commission recommended for an increase of 5 percent rise of union excise duties, but after that there was not cognisable increase of vertical transfer. Data of Taxes levied by the centre and statutory transfer of taxes from centre to states showed up to 1992 the devolution percentage varied from 22 to 28 from 1969-70.
Previously this transfer was from 15 to 20%. Various experts and members of Finance Commission recommended more transfer of resources to states. Dr. Bhabatosh Dutta a member of 4th Finance commission recommended a review of constitutional provisions for ensuring a better and a flexible devolution strategy. Bhabatosh Datta wanted to exploit potential of Article 269 of constitution. The second Finance Commission also commented that “Article 269 is an important source of revenue of the states.
The scope of the work of the Finance Commission in assessing the needs of the states has become restricted as a result of setting of planning commission. “For all these reasons it is for consideration whether time is not ripe for review of constitutional provisions dealing with financial relations between union and states. The tenth Finance commission also recognised the merits of making all taxes shareable.
Experts believe the rate of growth of central tax collection and recovery would catch up with the growth rate of GDP within 2007. In view of above Twelfth Finance commission should consider recommending an increase of devolution on a graduated scale from 29 percent to 35 percent.
Eleventh Finance commission recommended a ceiling of 37.5 percent of the center’s gross revenue receipts, which include plan and discretionary transfers. Experts hold that fixing of ceiling for discretionary transfers are not practical proposition as many states may suffer from natural calamities like cyclone in Orissa in 1999 and Earthquake in Gujarat in 2001. Alternatively, states also may suffer from lower revenue mobilisation and suffering from resource gap.
Here it appears that finance commissions mostly followed the resource gap filling approach in recommending finance allocation for states. Grants-in-aid in many occasions came to state’s rescue and federal revenue transfers in planning process also helped a great deal.
Plan grants were available to assist the states for implementing their plans, along with their own resources and those accruing from the finance commission’s recommendations, which are the statutory transfers. The gap-filling approach followed by successive Finance Commissions has not made proper judgement for financially prudent states.
The case of West Bengal illustrates the fact there is a deficit in West Bengal’s finance, due to low per capita revenue collection and a high per capita expenditure. West Bengal’s per capita income is relatively on high side close to Karnataka but tax to Gross State Domestic Product Ratio is 5.40 while that is 8.40 in Karnataka.
The various countries of the world—Argentina, Hungary Indonesia, and Australia have done away with-gapfiiling approach. The deficit should not form the basis of fund transfer; in that case fiscal indiscipline will get encouraged.
The principle should be “efficiency, equality and adequacy.” Internationally the size of population, zeal for revenue mobilisation gets more precedence over others. In India, such a policy should be adopted to encourage fiscal discipline among states.