Distribution of Tax Revenues

The 80th Amendment Act of 2000 and the 101st Amendment Act of 2016 have introduced major changes in the scheme of the distribution of tax revenues between the centre and the states.

The 80th Amendment was enacted to give effect to the recommendations of the 10th Finance Commission. The Commission recommended that out of the total income obtained from certain central taxes and duties, 29% should go to the states. This is known as the 'Alternative Scheme of Devolution’ and came into effect retrospectively from April 1, 1996. This amendment has brought several central taxes and duties like Corporation Tax and Customs Duties at par with Income Tax (taxes on income other than agricultural income) as far as their constitutionally mandated sharing with the states is concerned.17

The 101st Amendment has paved the way for the introduction of a new tax regime (i.e., goods and services tax - GST) in the country. Accordingly, the Amendment conferred concurrent taxing powers upon the Parliament and the State Legislatures to make laws for levying GST on every transaction of supply of goods or services or both. The GST replaced a number of indirect taxes levied by the Union and the State Governments and is intended to remove cascading effect of taxes and provide for a common national market for goods and services. The Amendment provided for subsuming of various central indirect taxes and levies such as (i) Central Excise Duty, (ii) Additional Excise Duties, (iii) Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, (iv) Service Tax, (v) Additional Customs Duty commonly known as Countervailing Duty, (vi) Special Additional Duty of Customs, and (vii) Central Surcharges and Cesses so far as they related to the supply of goods and services. Similarly, the Amendment provided for subsuming of (i) State Value Added Tax / Sales Tax, (ii) Entertainment Tax (other than the tax levied by the local bodies), (iii) Central Sales Tax (levied by the Centre and collected by the States), (iv) Octroi and Entry Tax, (v) Purchase Tax, (vi) Luxury Tax, (vii) Taxes on lottery, betting and gambling, and (viii) State Surcharges and Cesses in so far as they related to the supply of goods and services. Further, the Amendment deleted Article 268-A as

well as Entry 92-C in the Union List, both were dealing with service tax. They were added earlier by the 88th Amendment Act of 2003. The service tax was levied by the Centre but collected and appropriated by both the Centre and the States.

After the above two amendments (i.e., 80th Amendment and 101st Amendment), the present position with respect to the distribution of tax revenues between the centre and the states is as follows:

A. Taxes Levied by the Centre but Collected and Appropriated by the States (Article 268): This category includes the stamp duties on bills of exchange, cheques, promissory notes, policies of insurance, transfer of shares and others.

The proceeds of these duties levied within any state do not form a part of the Consolidated Fund of India, but are assigned to that state.

B. Taxes Levied and Collected by the Centre but Assigned to the States (Article 269): The following taxes fall under this category:

(i) Taxes on the sale or purchase of goods (other than newspapers) in the course of inter-state trade or commerce.

(ii) Taxes on the consignment of goods in the course of inter-state trade or commerce.

The net proceeds of these taxes do not form a part of the Consolidated Fund of India. They are assigned to the concerned states in accordance with the principles laid down by the Parliament.

C. Levy and Collection of Goods and Services Tax in Course of Inter-State Trade or Commerce (Article 269-A): The Goods and Services Tax (GST) on supplies in the course of inter-state trade or commerce are levied and collected by the Centre. But, this tax is divided between the Centre and the States in the manner provided by Parliament on the recommendations of the GST Council. Further, the Parliament is also authorized to formulate the principles for determining the place of supply, and when a supply of goods or services or both takes place in the course of inter-state trade or commerce.

D. Taxes Levied and Collected by the Centre but Distributed between the Centre and the States (Article 270): This category includes all taxes and duties referred to in the Union List except the following:

(i) Duties and taxes referred to in Articles 268, 269 and 269-A (mentioned above);

(ii) Surcharge on taxes and duties referred to in Article 271

(mentioned below); and

(iii) Any cess levied for specific purposes.

The manner of distribution of the net proceeds of these taxes and duties is prescribed by the President on the recommendation of the Finance Commission.

E. Surcharge on Certain Taxes and Duties for Purposes of the Centre (Article 271): The Parliament can at any time levy the surcharges on taxes and duties referred to in Articles 269 and 270 (mentioned above). The proceeds of such surcharges go to the Centre exclusively. In other words, the states have no share in these surcharges.

However, the Goods and Services Tax (GST) is exempted from this surcharge. In other words, this surcharge can not be imposed on the GST.

F. Taxes Levied and Collected and Retained by the States: These are the taxes belonging to the states exclusively. They are enumerated in the state list and are 18 in number. These are18 : (i) land revenue; (ii) taxes on agricultural income; (iii) duties in respect of succession to agricultural land; (iv) estate duty in respect of agricultural land; (v) taxes on lands and buildings; (vi) taxes on mineral rights; (vii) Duties of excise on alcoholic liquors for human consumption; opium, Indian hemp and other narcotic drugs and narcotics, but not including medicinal and toilet preparations containing alcohol or narcotics; (viii) taxes on the consumption or sale or electricity; (ix) taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-state trade or commerce or sale in the course of international trade or commerce of such goods; (x) taxes on goods and passengers carried by road or inland waterways; (xi) taxes on vehicles; (xii) taxes on animals and boats; (xiii) tolls; (xiv) taxes on professions, trades, callings and employments; (xv) capitation taxes; (xvi) taxes on entertainments and amusements to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or a District Council; (xvii) stamp duty on documents (except those specified in the Union List); and (xviii) fees on the matters enumerated in the State List (except court fees).