One Nation, Shared Authority: Legislative, Administrative, and Financial Ties Between Union and States

Centre–State Relations

The Indian Constitution is federal in structure and distributes legislative, executive, and financial powers between the Centre and the states. Notably, judicial power is not divided — the Constitution instead establishes a single integrated judicial system that enforces both Central and state laws. The three broad dimensions of Centre–state relations are:

• Legislative relations (Articles 245–255, Part XI)
• Administrative relations (Articles 256–263, Part XI)
• Financial relations (Articles 268–293, Part XII)

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1. Territorial Extent of Legislation

• Parliament can legislate for the entire territory of India, including states, union territories, and any temporarily included area. Parliament alone can enact extra-territorial legislation binding on Indian citizens and their property anywhere in the world.
• State legislatures can legislate only for their respective state territories. State laws do not operate beyond state boundaries unless a sufficient nexus exists between the state and the object of regulation.
• Exceptions to Parliament's plenary territorial reach:
  • The President can issue regulations for four UTs — Andaman & Nicobar Islands, Lakshadweep, Dadra & Nagar Haveli, and Daman & Diu — with the force of Parliamentary law.
  • Governors can direct that Parliamentary laws do not apply to Scheduled Areas within their states, or apply with modifications.
  • The Governor of Assam (and the President for Meghalaya, Tripura, Mizoram) can similarly exclude or modify Parliamentary laws for tribal autonomous districts.

2. Distribution of Legislative Subjects (Seventh Schedule)

• Residuary powers (subjects not in any list) vest with Parliament, including the power to levy residuary taxes.
• The 42nd Amendment Act (1976) transferred five subjects — education, forests, weights & measures, protection of wild animals and birds, and administration of justice below the High Court level — from the State List to the Concurrent List.
• Hierarchy of Lists: Union List prevails over State and Concurrent Lists; Concurrent List prevails over State List.
• Concurrent List conflict rule: If a Central law and a state law both operate on the same Concurrent subject, the Central law prevails. Exception: if the state law was reserved for Presidential assent and received it, the state law prevails within that state — but Parliament can override it by subsequent legislation.

Comparative note: The US and Australia enumerate only federal powers, leaving residuary powers to states. Canada uses double enumeration with residuary powers at the Centre. India follows the Canadian model for residuary power, while adopting a three-list scheme inherited from the Government of India Act, 1935.

3. Parliamentary Legislation in the State Field

Under five exceptional circumstances, Parliament acquires the power to legislate on State List subjects:

a) Rajya Sabha Resolution (National Interest)

• If Rajya Sabha passes a resolution by a two-thirds majority of members present and voting declaring national interest, Parliament can legislate on State List matters.
• Resolution valid for one year; renewable indefinitely in one-year increments.
• State laws on the same subject remain valid but yield to Parliamentary law in case of conflict.
• Laws so enacted cease to operate six months after the resolution lapses.

b) During National Emergency (Article 352)

• Parliament gains legislative power over the entire State List during a National Emergency.
• State legislatures are not suspended but their laws must give way to Parliamentary law.
• Laws lapse six months after the Emergency ends.

c) State Request (Two or More States)

• If legislatures of two or more states pass resolutions requesting Parliament to legislate on a State List matter, Parliament may do so.
• Such a law applies only to the consenting states; other states may adopt it later.
• The state legislature surrenders its power over that subject entirely — only Parliament can then amend or repeal the law.
• Examples: Prize Competition Act (1955), Wild Life (Protection) Act (1972), Water (Prevention and Control of Pollution) Act (1974), Transplantation of Human Organs Act (1994).

d) Implementation of International Treaties (Article 253)

• Parliament can legislate on any State List matter to honour international treaties, agreements, or conventions.
• Examples: UN (Privileges and Immunities) Act (1947), Geneva Convention Act (1960), Anti-Hijacking Act (1982), TRIPS-related legislations.

e) During President's Rule (Article 356)

• Parliament gains full legislative competence over the state's subjects while President's Rule is in operation.
• Laws made during this period continue to operate even after President's Rule ends.
• Such laws can later be amended, repealed, or re-enacted by the revived state legislature.

4. Centre's Control Over State Legislation

• The Governor can reserve certain state bills for Presidential consideration; the President has an absolute veto over such bills.
• Bills on certain State List subjects — particularly those imposing restrictions on freedom of trade and commerce — require the prior sanction of the President before introduction in the state legislature.
• During a financial emergency, the President can direct states to reserve money bills and financial bills for Presidential consideration.

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Distribution of Executive Powers

• The Centre's executive power extends to all Union List subjects and to treaty-derived rights.
• States' executive power covers State List subjects.
• For Concurrent List subjects, executive power generally vests with states unless the Constitution or Parliament specifically confers it on the Centre.

Obligations on States

The Constitution imposes two key constraints on states:

1. States must exercise their executive power in conformity with Parliamentary laws and applicable existing laws.
2. States must not obstruct or impede the Centre's exercise of executive power.

If a state fails to comply with Central directions, Article 365 enables the President to conclude that constitutional governance in that state has broken down — providing a constitutional basis for imposing President's Rule under Article 356.

Centre's Directions to States

Beyond the above, the Centre can issue binding directions to states on:

• Construction and maintenance of nationally/militarily important communication routes.
• Protecting railways within the state.
• Providing mother-tongue instruction at the primary level for linguistic minority children.
• Implementation of welfare schemes for Scheduled Tribes.

Mutual Delegation of Executive Functions

• The President, with the state's consent, can entrust Central executive functions to a state government (conditionally or unconditionally).
• The Governor, with the Centre's consent, can entrust state executive functions to the Centre.
• Parliament can also confer Central powers on a state even without that state's consent — a method unavailable to state legislatures.
• Thus, the Centre can delegate functions through both agreement and legislation, while states can only use the agreement route.

Cooperation Mechanisms

• Parliament can adjudicate inter-state river water disputes.
• The President can establish an Inter-State Council under Article 263 (established in 1990).
• Full faith and credit is extended to public acts, records, and judicial proceedings across the entire territory of India.
• Parliament can appoint an authority to manage inter-state freedom of trade and commerce (no such authority has been appointed yet).

All-India Services

Three All-India Services — IAS, IPS, and IFS — exist alongside Central and state services. Their key features:

• Members occupy strategic posts under both Centre and states.
• Recruited and trained by the Centre; ultimate control with Centre, immediate control with states.
• ICS replaced by IAS and IP replaced by IPS in 1947 (recognised by the Constitution); IFS created in 1966.
• Parliament can create new All-India Services via a Rajya Sabha resolution (Article 312).
• They maintain uniform pay scales, common rights, and uniform status across states.
• While they limit state autonomy, they ensure administrative quality, national uniformity, and Centre–state coordination.

Public Service Commissions

• State PSC members are appointed by the Governor but removed only by the President.
• Parliament can establish a Joint State Public Service Commission (JSPSC) for two or more states at their legislatures' request; members appointed by the President.
• The UPSC can serve state needs on the Governor's request with Presidential approval, and assist states in joint recruitment.

Integrated Judicial System

• No dual court system exists in India. The Supreme Court is at the apex, with state High Courts below it — enforcing both Central and state laws.
• High Court judges are appointed by the President in consultation with the CJI and the Governor, and can be transferred or removed by the President.
• Parliament can establish a common High Court for two or more states (e.g., Punjab & Haryana, Maharashtra & Goa).

Relations During Emergencies

• National Emergency (Article 352): Centre can issue executive directions to states on any matter; state governments remain but are under complete Central control.
• President's Rule (Article 356): President assumes state government functions; Governor's and other executive authorities' powers vest in the President.
• Financial Emergency (Article 360): Centre directs states on financial propriety, including salary reductions of state personnel and High Court judges, and reservation of money bills for Presidential assent.

Extra-Constitutional Mechanisms

Non-statutory advisory bodies facilitating coordination include: NITI Aayog (formerly Planning Commission), National Development Council, National Integration Council, Zonal Councils, North-Eastern Council, and various Central Councils (Health, Local Government, Indian Medicine, Homoeopathy, etc.).

Key consultative conferences: Governors' Conference (presided by President), Chief Ministers' Conference (by PM), Chief Secretaries' Conference (by Cabinet Secretary), Home Ministers' Conference, Law Ministers' Conference, Chief Justices' Conference (by CJI), and others.

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Allocation of Taxing Powers

• Parliament alone levies taxes on 15 Union List subjects.
• State legislatures alone levy taxes on 20 State List subjects.
• Both can levy taxes on 3 Concurrent List subjects.
• Residuary taxing power (e.g., gift tax, wealth tax, expenditure tax) vests with Parliament.

Restrictions on state taxing powers:

• Profession tax cannot exceed Rs 2,500 per annum per person (raised from Rs 250 by the 60th Amendment, 1988).
• Sales tax on goods cannot be imposed on inter-state, import/export, or Parliament-notified special goods transactions.
• No electricity tax on consumption or sale to the Centre or for railway purposes.
• Tax on inter-state river authority electricity requires Presidential assent.

Distribution of Tax Revenues

A. Article 268 — Levied by Centre, Collected and Retained by States:

• Stamp duties on bills of exchange, cheques, promissory notes, insurance policies, share transfers.
• Excise duties on medicinal/toilet preparations containing alcohol or narcotics.
• Proceeds remain with the state where levied and do not enter the Consolidated Fund of India.

B. Article 268-A — Service Tax (levied by Centre, collected and appropriated by both):

• Service tax levied by Centre; proceeds collected and appropriated by both Centre and states as per Parliamentary principles.

C. Article 269 — Levied and Collected by Centre, Assigned to States:

• Taxes on inter-state sale/purchase of goods (non-newspaper) and inter-state consignment of goods.
• Net proceeds assigned to respective states; not part of Consolidated Fund of India.

D. Article 270 — Levied and Collected by Centre, Distributed between Centre and States:

• All Union List taxes/duties except those under Articles 268, 268-A, 269, surcharges under Article 271, and specific cesses.
• Distribution ratio decided by the President on Finance Commission recommendations.

E. Article 271 — Surcharge (entirely for the Centre):

• Parliament may levy surcharges on taxes under Articles 269 and 270; states have no share.

F. State-Exclusive Taxes:

• 20 categories including land revenue, agricultural income tax, taxes on land and buildings, mineral rights, luxuries, entertainment, gambling, alcohol excise, vehicle taxes, profession taxes, tolls, and stamp duty on non-Union-List documents.

80th Amendment (2000): Implemented 10th Finance Commission's Alternative Scheme of Devolution — 29% of specified central taxes shared with states (retrospectively from April 1, 1996); brought Corporation Tax and Customs Duties on par with Income Tax for mandatory sharing.

88th Amendment (2003): Added Article 268-A and Entry 92-C (taxes on services) in the Union List.

Distribution of Non-Tax Revenues

• Centre: Posts & telegraphs, railways, banking, broadcasting, coinage, Central PSEs, escheat and lapse.
• States: Irrigation, forests, fisheries, state PSEs, escheat and lapse.

Grants-in-Aid

Statutory Grants (Article 275):

• Parliament grants funds to needy states (not uniformly); charged on the Consolidated Fund of India.
• Specific grants also available for welfare of Scheduled Tribes and development of Scheduled Areas including Assam.
• All statutory grants are made on Finance Commission recommendations.

Discretionary Grants (Article 282):

• Both Centre and states may make grants for any public purpose, even outside their legislative competence.
• Centre uses this to support plan targets and influence state actions to align with national planning — forming the larger portion of Central grants.
• These are not obligatory; the Centre exercises discretion in their allocation.

Temporary Grants:

• Grants in lieu of export duty on jute/jute products to Assam, Bihar, Orissa, and West Bengal for 10 years from the Constitution's commencement.

Finance Commission (Article 280)

• A quasi-judicial body constituted by the President every five years (or earlier).
• Recommends:
  • Distribution of net tax proceeds between Centre and states and among states.
  • Principles governing grants-in-aid from Centre to states.
  • Measures to supplement Consolidated Funds of states to support panchayats and municipalities (added by 73rd and 74th Amendments, 1992).
  • Any other matter referred by the President.
• Envisaged as the balancing wheel of fiscal federalism, though its role has been diluted by the non-constitutional Planning Commission.

Protection of States' Financial Interests

Certain bills can be introduced in Parliament only on the President's recommendation:

• Bills imposing or varying taxes in which states have an interest.
• Bills redefining 'agricultural income' for income-tax purposes.
• Bills affecting the principles of revenue distribution to states.
• Bills imposing surcharges on specified taxes.

The net proceeds of any tax (proceeds minus collection costs) are certified by the Comptroller and Auditor-General, whose certificate is final.

Borrowing Powers

• Centre can borrow domestically or abroad against the Consolidated Fund of India, within Parliamentary limits (no such limit enacted yet).
• States can borrow only within India, within limits set by the state legislature.
• Centre can lend to states or guarantee state loans (charged on Consolidated Fund of India).
• States with outstanding Central loans or Central-guaranteed loans cannot borrow further without Central consent.

Inter-Governmental Tax Immunities

• Central property is exempt from state/local taxation; Parliament can waive this exemption.
  • Central corporations/companies are NOT immune (separate legal entities).
• State property and income are exempt from Central taxation.
  • States' commercial operations can be taxed by Parliament if it so provides.
  • Local authority property in a state is NOT exempt from Central taxation.
  • State-owned corporations can be taxed by Centre.
  • The Supreme Court (1963) held that state immunity does not extend to customs or excise duties.

Effects of Emergencies on Financial Relations

• National Emergency: President can modify revenue distribution between Centre and states (reduce or cancel transfers); modification continues until end of the financial year after the Emergency ceases.
• Financial Emergency: Centre directs states on financial propriety, can reduce salaries of state personnel including High Court judges, and can require all money bills to be reserved for Presidential assent.

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Background

Until 1967, single-party dominance at both Centre and states maintained smooth relations. The 1967 elections fractured this — Congress lost nine states, non-Congress state governments arose, and demands for greater autonomy intensified. Key tension areas include: appointment and partisan use of governors, abuse of President's Rule, deployment of Central forces, financial discrimination, Planning Commission interference, management of All-India Services, and encroachment on the State List.

Administrative Reforms Commission (ARC), 1966

• Chaired by Morarji Desai (later K. Hanumanthayya); M.C. Setalvad led the study team.
• Submitted its report in 1969 with 22 recommendations, including setting up an Inter-State Council, appointing apolitical governors, maximum delegation to states, and increasing financial transfers.
• No action taken by the Central government.

Rajamannar Committee, 1969

• Appointed by Tamil Nadu (DMK government) under Dr. P.V. Rajamannar.
• Identified centralizing factors: special Centre powers in Constitution, one-party dominance, fiscal dependence of states, and Planning Commission's role.
• Recommended: Inter-State Council, permanent Finance Commission, dissolving Planning Commission (replaced by statutory body), deleting Articles 356–365, transferring subjects to State List, residuary powers to states, abolishing All-India Services.
• Central government completely ignored the report.

Anandpur Sahib Resolution, 1973

• Passed by the Akali Dal; demanded Centre's jurisdiction be restricted to defence, foreign affairs, communications, and currency, with all residuary powers vested in states.

West Bengal Memorandum, 1977

• Submitted by the Left Front government; demanded: replacing 'Union' with 'Federal', limiting Centre to five subjects, repealing Articles 356–360, equal Rajya Sabha representation for all states, 75% of all Central revenue to go to states, abolition of All-India Services.
• Not accepted by the Central government.

Sarkaria Commission, 1983–1987

• Appointed by the Central government under retired SC judge R.S. Sarkaria; submitted final report in October 1987.
• Approach: Opposed structural changes; favoured operational/functional reforms. Described federalism as a cooperative functional arrangement, not a rigid institutional concept. Rejected curtailing Centre's powers; warned against over-centralisation causing peripheral anemia.
• Key recommendations (out of 247):
  1. Permanent Inter-State Council (Inter-Governmental Council) under Article 263.
  2. Article 356 to be used as a last resort sparingly.
  3. Strengthen All-India Services; create more.
  4. Residuary taxation powers to remain with Parliament; other residuary powers to Concurrent List.
  5. Reasons for withholding Presidential assent to state bills must be communicated.
  6. NDC to be renamed National Economic and Development Council.
  7. Reactivate Zonal Councils.
  8. Centre can deploy armed forces without state consent (consultation desirable).
  9. Centre should consult states before legislating on Concurrent subjects.
  10. Governor's appointment procedure to include mandatory consultation with Chief Minister (in Constitution).
  11. Corporation Tax proceeds to be shareable with states.
  12. Governor cannot dismiss a ministry that commands assembly majority.
  13. Governor's five-year tenure should not be disturbed without compelling reasons.
  14. No enquiry commission against a state minister unless Parliament demands it.
• 180 out of 247 recommendations implemented. Most significant: establishment of Inter-State Council in 1990.

Punchhi Commission, 2007–2010

• Second Commission on Centre–State Relations; chaired by former CJI Madan Mohan Punchhi.
• Submitted a 1,456-page, 7-volume report in April 2010.
• Central conclusion: 'Cooperative federalism' is the key for India's unity, integrity, and development.
• Key recommendations (out of 310+):
  1. Broad Centre–state agreement before legislation on Concurrent List subjects.
  2. Union should exercise restraint in asserting parliamentary supremacy over State List matters.
  3. Inter-State Council should have a continuing auditing role for concurrent jurisdiction matters.
  4. Six-month time limit for President's action on reserved state bills (mirroring the state legislature's time limit).
  5. Governors to have fixed five-year tenure; removal not at Centre's pleasure.
  6. Procedure for Governor's impeachment akin to President's.
  7. Article 163 does not give the Governor general discretionary power against Council of Ministers' advice.
  8. Governor to decide within six months on bills passed by state legislature.
  9. Hung assembly — clear conventions for government formation; post-electoral coalition joining government preferred over outside support.
  10. Governor to insist on Chief Minister proving majority on the floor of the House before dismissal.
  11. Convention of Governors as University Chancellors should be abolished.
  12. 'Localised emergency' framework under Article 355 for situations not warranting Articles 352 or 356.
  13. Article 263 to be amended to make Inter-State Council more credible and powerful.
  14. Zonal Councils to meet at least twice a year.
  15. New All-India Services in health, education, engineering, and judiciary.
  16. Equal representation of all states in Rajya Sabha irrespective of population.
  17. Royalty rates on major minerals to be revised at least every three years.
  18. Current ceiling on profession tax to be removed by Constitutional amendment.

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• Article numbers for all three dimensions are frequently tested: Legislative (245–255), Administrative (256–263), Financial (268–293).
• List subjects: Current counts — Union (100), State (61), Concurrent (52). 42nd Amendment transfers are a recurring question.
• Five circumstances for Parliamentary legislation in State field — know the specific conditions, duration, and effect on state legislature for each.
• Sarkaria vs Punchhi Commission distinctions: year, chairperson, number of recommendations, major findings, and the concept of cooperative federalism.
• Finance Commission vs Planning Commission/NITI Aayog — constitutional vs non-constitutional; role in fiscal federalism.
• Article 270 vs 268 vs 269 — distinguish which taxes are levied/collected/distributed by whom.
• Inter-State Council — Article 263, established 1990, Sarkaria recommendation.
• All-India Services — Article 312, three services, recruited by Centre, controlled jointly.
• Immunity provisions — Central property from state tax; state property from Central tax; exceptions for customs/excise (1963 SC opinion).