Allocation of Taxing Powers

The Constitution divides the taxing powers between the Centre and the states in the following way:

• The Parliament has exclusive power to levy taxes on subjects enumerated in the Union List (which are 13 in number12 ).

• The state legislature has exclusive power to levy taxes on subjects enumerated in the State List (which are 18 in number 13

• There are no tax entries in the Concurrent List. In other words, the concurrent jurisdiction is not available with respect to tax legislation. But, the 101st Amendment Act of 2016 has made an exception by making a special provision with respect to goods and services tax. This Amendment has conferred concurrent power upon Parliament and State Legislatures to make laws governing goods and services tax14 .

• The residuary power of taxation (that is, the power to impose taxes not enumerated in any of the three lists) is vested in the Parliament. Under this provision, the Parliament has imposed gift tax, wealth tax and expenditure tax.

Table 14.2 Articles Related to Centre-State Administrative Relations at a Glance

Article No. Subject Matter

256. Obligation of states and the Union

257. Control of the Union over states in certain cases

257A. Assistance to states by deployment of armed forces or other forces of the Union (Repealed)

258. Power of the Union to confer powers, etc., on states in certain cases

258A. Power of the states to entrust functions to the Union

259. Armed Forces in states in Part B of the First Schedule (Repealed)

260. Jurisdiction of the Union in relation to territories outside India

261. Public acts, records and judicial proceedings

262. Adjudication of disputes relating to waters of inter- state rivers or river valleys

263. Provisions with respect to an inter-state Council

The Constitution also draws a distinction between the power to levy and collect a tax and the power to appropriate the proceeds of the tax so levied and collected. For example, the income-tax is levied and collected by the Centre but its proceeds are distributed between the Centre and the states.

Further, the Constitution has placed the following restrictions on the taxing powers of the states:

(i) A state legislature can impose taxes on professions, trades, callings and employments. But, the total amount of such taxes payable by any person should not exceed ₹2,500 per annum.15

(ii) A state legislature is prohibited from imposing a tax on the supply of goods or services or both in the following two cases : (a) where such supply takes place outside the state; and (b) where such supply takes place in the course of import or export. Further, the Parliament is empowered to formulate the principles for determining when a supply of goods or services or both takes place outside the state, or in the course of import or export16 .

(iii) A state legislature can impose tax on the consumption or sale of electricity. But, no tax can be imposed on the consumption or sale of electricity which is (a) consumed by the Centre or sold to the Centre; or (b) consumed in the construction, maintenance or operation of any railway by the Centre or by the concerned railway company or sold to the Centre or the railway company for the same purpose.

(iv) A state legislature can impose a tax in respect of any water or electricity stored, generated, consumed, distributed or sold by any authority established by Parliament for regulating or developing any inter-state river or river valley. But, such a law, to be effective,

should be reserved for the president’s consideration and receive his assent.

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