Center State Relations

Introduction

First, let us recall the basic point:
India is a federal country in terms of structure because powers are divided between the Centre and the States. This division of powers is the foundation of federalism.

👉 But there’s a twist—India is not a classical federation like the USA or Switzerland. Our Constitution has its own unique design.

Division of Powers

The Constitution divides powers into three heads:

• Legislative powers – law-making authority.
• Executive powers – responsibility to implement those laws.
• Financial powers – authority to levy taxes and spend money.

⚖️ Important point: Judicial powers are not divided. Instead, India has one integrated judiciary—from the Supreme Court at the top down to subordinate courts in the states. This judiciary enforces both Central laws and State laws.
This makes India different from the USA, where federal and state courts operate separately.

Why Harmony is Needed

Now, even though Centre and States are supreme in their own fields, federalism will collapse if they keep clashing.
So, the Constitution provides detailed provisions to maintain harmony and coordination.

This means that our Constitution is not just about dividing powers, but also about managing relations between the two levels of government.

Dimensions of Centre–State Relations

To study these relations systematically, we divide them into three broad categories:

1. Legislative Relations → Who can make laws on what subjects.
2. Administrative Relations → Who will execute or implement the laws.
3. Financial Relations → Who will collect and spend revenue.

Legislative Relations Between Centre and States

(Articles 245–255, Part XI)

The relationship between Centre and States in the law-making process is one of the most crucial aspects of Indian federalism. It determines “who can make laws on what subjects and for which territories.”

The Constitution discusses this under four broad heads:

1. Territorial extent of legislation
2. Distribution of legislative subjects
3. Parliamentary legislation in the State field (exceptional situations)
4. Centre’s control over State legislation

Let us understand them:

1. Territorial Extent of Laws

• Parliament → Can make laws for whole or any part of India.
  • This includes States, Union Territories, and even acquired territories.
  • It also has power of extraterritorial legislation, i.e., laws applicable to Indian citizens and their property even outside India (e.g., Citizenship laws, Income Tax on global income).
• State Legislature → Can make laws only for its territory.
  • A state law normally does not apply outside its boundary.
  • Exception: If there is a sufficient nexus (connection), it may extend beyond (e.g., taxing transactions that affect the state’s economy even if executed outside).
• Restrictions on Parliament’s plenary power:
  • UTs – In five UTs (Andaman & Nicobar, Lakshadweep, Dadra & Nagar Haveli & Daman & Diu, Ladakh), the President can directly make regulations, which have the same effect as a law of Parliament.
  • Scheduled Areas – The Governor can restrict or modify the application of a Central law in Scheduled Areas of a State.
  • Tribal Areas (6th Schedule) – The Governor of Assam (for Assam’s tribal areas) and the President (for Meghalaya, Mizoram, Tripura) can direct that a Central law will not apply, or will apply with modifications.

2. Distribution of Legislative Subjects

The Constitution follows the Three-List Model (7th Schedule):

1. Union List (97 subjects as of 2025, originally 97)
   • Exclusive domain of Parliament.
   • Matters of national importance: defence, foreign affairs, banking, currency, atomic energy, etc.
2. State List (61 subjects as of 2025, originally 66)
   • Exclusive domain of State Legislatures (in normal times).
   • Matters of local/regional importance: police, public health, agriculture, markets, local government, etc.
3. Concurrent List (52 subjects as of 2025, originally 47)
   • Both Parliament and State Legislatures can make laws.
   • Matters requiring uniformity + flexibility: criminal law, civil procedure, marriage & divorce, forests, education, electricity, labour welfare, etc.
   • 42nd Amendment (1976) shifted 5 subjects from State List → Concurrent List:
     (a) Education, (b) Forests, (c) Weights & Measures, (d) Protection of Wild Animals & Birds, (e) Administration of justice (except SC & HC).
4. Residuary Subjects
   • Matters not listed in any of the three lists → Power given to Parliament (unlike USA where residuary goes to States).
5. Special Case: GST (101st Amendment, 2016)
   • Both Parliament & State legislatures can make laws on GST.
   • Exclusive power of Parliament on inter-state supply of goods/services.

Rule of Supremacy (Conflict Resolution):

• Union List > State List & Concurrent List
• Concurrent List > State List
• If both Centre & State make laws on a Concurrent subject → Central law prevails.
  • Exception: If State law has received President’s assent, it prevails in that State.
  • But even then, Parliament can override it later.

3. Parliamentary Legislation in the State Field (Exceptional Situations)

Normally, State List is for States. But five situations allow Parliament to make laws on State subjects:

1. When Rajya Sabha Passes a Resolution
   1. If Rajya Sabha (by 2/3rd present & voting) declares it is necessary in national interest, Parliament can legislate on a State subject.
   1. Valid for 1 year (can be renewed).
   1. Such a law prevails over State law.
2. During National Emergency (Art. 352)
   1. Parliament can legislate on State List during an Emergency.
   1. Laws remain valid till 6 months after emergency ends.
3. When States Make a Request (Art. 252)
   1. If 2 or more State legislatures request, Parliament can legislate for them on a State subject.
   1. Other States can adopt later by passing a resolution.
   1. Example: Wildlife (Protection) Act, 1972; Water (Prevention & Control of Pollution) Act, 1974.
   1. Such laws can be amended/repealed only by Parliament.
4. To Implement International Agreements (Art. 253)
   1. Parliament can make laws on State List subjects to honour international treaties/conventions.
   1. Example: Environment laws after Stockholm Conference; TRIPS-related IP laws.
5. During President’s Rule (Art. 356)
   1. When State legislature is suspended, Parliament can legislate on its behalf.
   1. Such laws remain valid even after President’s Rule ends (until changed by State legislature).

4. Centre’s Control Over State Legislation

Apart from these exceptional powers, Centre also has routine control mechanisms over State laws:

1. Reservation of Bills for President’s assent → Governor can reserve certain bills (e.g., those affecting national interest). President has absolute veto.
2. Prior Presidential sanction required → For introducing certain State bills (e.g., restricting trade & commerce freedom).
3. During Financial Emergency (Art. 360) → States may be directed to reserve Money Bills for President’s consideration.

Federal Supremacy in Law-Making

All these provisions tilt the balance towards the Centre’s dominance in legislation.
The Sarkaria Commission (1983–88) clearly noted:

“Union supremacy is essential to avoid chaos and conflict. Without it, India’s federal system would be paralysed by legal confusion.”

Thus, India’s legislative federalism is not one of equal partners, but one of “cooperative federalism with central predominance.”

✅ Wrap-Up:
Legislative relations show India’s quasi-federal character. The division of powers ensures autonomy for States, but the Centre’s supremacy ensures unity of the nation.

Administrative Relations Between Centre and States

(Articles 256–263, Part XI)

If legislative relations answer the question “Who will make laws?”, then administrative relations deal with “Who will execute and implement those laws?”

Just like legislative powers, executive powers are also divided between the Centre and the States. But here, the Centre enjoys more authority to ensure coordination and discipline in the federal system.

Distribution of Executive Powers

• Centre’s Executive Power extends to:
  1. Matters in the Union List (exclusive Parliament domain).
  2. Rights and authority under treaties and agreements.
  3. Entire territory of India.
• State’s Executive Power extends to:
  1. Matters in the State List (exclusive State domain).
  2. Limited to its own territorial jurisdiction.
• Concurrent List subjects:

• Here, the default rule is that executive power rests with States.
• But Parliament or the Constitution itself may specifically give executive power to the Centre.
• Example: Parliament may pass a law on forests (Concurrent subject) but assign responsibility of execution to the Centre.

Obligation of States and the Centre

The Constitution puts two restrictions on the executive power of States:

1. State must ensure compliance with laws of Parliament and existing Central laws.
2. State must not act in a way that obstructs the Centre’s executive power.

👉 To enforce this, the Centre can issue directions to States.

• If a State defies directions, Article 365 comes into play:
  • The President can declare that the constitutional machinery of the State has failed, paving the way for President’s Rule (Article 356).
  • This shows the coercive sanction behind Centre’s directions.

Centre’s Directions to States

Apart from general restrictions, the Centre can give specific directions to States on:

1. Construction & maintenance of means of communication of national/military importance.
2. Protection of railways.
3. Primary education in mother tongue for children of linguistic minorities.
4. Implementation of schemes for Scheduled Tribes.

👉 Again, refusal to comply with these directions may invite action under Article 365.

Mutual Delegation of Functions

Here comes an important flexibility feature:

• General Rule: Centre cannot delegate legislative powers to States, and States cannot ask Parliament alone to legislate on their behalf.
• But in administrative functions, there is scope for mutual delegation:
  • By Agreement:
    • President → State: With State’s consent, President may entrust certain Central functions to the State government.
    • Governor → Centre: With Centre’s consent, Governor may entrust certain State functions to the Union government.
  • By Legislation:
    • Parliament may pass a law that confers powers or imposes duties on States regarding Union List subjects.
    • This can be done without the consent of States.
    • But the reverse is not possible → A State legislature cannot impose duties on the Centre.

👉 So, Centre has both routes (agreement + legislation), while States have only agreement route.

We already saw how executive powers are divided and how directions and delegation work. Now let us focus on other mechanisms that ensure cooperation, coordination and control between the Centre and the States.

Cooperation Between the Centre and States

The Constitution itself builds in several tools to ensure harmony:

1. Water Disputes → Parliament can provide for adjudication of disputes about the use and distribution of inter-state rivers (e.g., Cauvery, Krishna disputes).
2. Inter-State Council (Article 263) → The President can set up such a council to investigate and discuss matters of common interest. (Formed in 1990 on Sarkaria Commission’s recommendation).
3. Full Faith and Credit → Every State and the Union must recognise public acts, records and judicial proceedings of others (similar to U.S. practice).
4. Trade & Commerce → Parliament may appoint an authority to oversee inter-state trade and commerce (though, in practice, none has been appointed so far).

All-India Services (IAS, IPS, IFS)

Apart from Central and State services, India uniquely has All-India Services, which serve both Centre and States.

• Recruitment & Training → Done by the Centre.
• Control → Dual control → Immediate control with States, ultimate control with Centre.
• Services included:
  • Indian Administrative Service (IAS) – 1947 (replaced ICS).
  • Indian Police Service (IPS) – 1947 (replaced IP).
  • Indian Forest Service (IFS) – 1966.
• New All-India Services → Can be created by Parliament, if Rajya Sabha passes a resolution under Article 312.

⚖️ Criticism: They violate federalism as they curb State autonomy.

✅ Justification:

1. Ensure high administrative standards.
2. Maintain uniformity across the nation.
3. Act as a link between Centre and States.

Dr. Ambedkar justified them in the Constituent Assembly by saying certain strategic posts need all-India level officers to maintain quality governance.

Public Service Commissions

Here, too, we see Centre’s influence:

1. State PSC → Members appointed by the Governor, but can only be removed by the President.
2. Joint State PSC (JSPSC) → Parliament can establish one for 2+ States (on request). Members appointed by President.
3. UPSC → Can serve States, if Governor requests and President approves.
4. Joint recruitment → UPSC can help multiple States recruit for specialised posts.

Thus, the Centre plays a supervisory role even in State recruitment.

Integrated Judicial System

Unlike USA, India has one unified judiciary:

• Supreme Court at the top → interprets both Central & State laws.
• High Courts under it → enforce both Central & State laws.
• Judges of High Courts → Appointed, transferred, or removed by President (with consultations).
• Common High Court → Parliament may set up for multiple States (e.g., Punjab & Haryana, Maharashtra & Goa).

👉 This integration avoids conflicting interpretations of law across States.

Relations During Emergencies

Centre’s control becomes absolute during emergencies:

1. National Emergency (Article 352) → Centre can issue executive directions on any matter to States.
2. President’s Rule (Article 356) → President assumes functions of the State government and Governor.
3. Financial Emergency (Article 360) → Centre may direct States on financial matters, even order salary cuts for State officials.

Other Provisions of Control

1. Article 355 → Duty of the Centre to:
   • Protect States from external aggression & internal disturbance.
   • Ensure State government functions according to the Constitution.
2. Governor → Appointed by President, holds office during his pleasure. Acts as the Centre’s agent in States, sending reports.
3. State Election Commissioner → Appointed by Governor, but can only be removed by President.

Extra-Constitutional Devices

Beyond constitutional provisions, cooperation also happens via non-constitutional/advisory bodies and conferences:

• Advisory Bodies:
  • NITI Aayog (replaced Planning Commission)
  • National Integration Council
  • Central Council of Health & Family Welfare
  • Zonal Councils
  • North-Eastern Council
  • UGC, etc.
• Conferences (regularly held):
  • Governors’ Conference (by President)
  • Chief Ministers’ Conference (by PM)
  • Chief Secretaries’ Conference (by Cabinet Secretary)
  • IG Police Conference
  • Chief Justices’ Conference
  • Vice-Chancellors’ Conference
  • Home Ministers’ Conference, Law Ministers’ Conference, etc.

👉 These bodies work as platforms of consultation and coordination, supplementing constitutional mechanisms.

Centre–State Financial Relations

(Articles 268–293, Part XII)

So far, we have seen legislative relations (who makes the laws) and administrative relations (who implements them). But both these depend on money. Therefore, financial relations between Centre and States are extremely crucial, because without adequate financial resources, neither level of government can function effectively.

Allocation of Taxing Powers

The Constitution clearly divides taxing powers between Centre and States:

• Parliament (Union List) → Exclusive power to levy 13 types of taxes (e.g., customs, income tax, corporation tax).
• State Legislatures (State List) → Exclusive power to levy 18 types of taxes (e.g., land revenue, excise duty on liquor, taxes on vehicles, entertainment tax at local level).
• Concurrent List → No tax entries.
  • Exception: 101st Amendment (2016) introduced GST, giving concurrent power to both Centre and States.
• Residuary Power of Taxation → Vested in Parliament.
  • Example: Gift tax, wealth tax, expenditure tax.

⚖️ Key Point: The Constitution distinguishes between the power to levy & collect and the power to appropriate (spend) the tax.

• Example: Income Tax is levied & collected by the Centre, but proceeds are shared with States.

Restrictions on States’ Taxing Powers

To maintain national economic unity, States cannot impose unlimited taxes. Restrictions include:

1. Professional Tax Limit → A State can tax profession, trades, employments, but maximum is ₹2,500 per person per year.
2. Restrictions on GST/Trade → States cannot tax goods/services when:
   • Supply takes place outside the State, or
   • Supply occurs in the course of import/export.
     (Parliament decides principles to determine these cases).
3. Electricity Tax Restrictions →
   • States cannot tax electricity consumed by the Centre or Railways.
4. Inter-State River Authorities → If a State taxes water/electricity from an authority set up by Parliament, the Bill must be reserved for President’s assent.

Distribution of Tax Revenues

Now, the heart of financial relations lies in how revenues are shared. Two major amendments reshaped this:

• 80th Amendment Act (2000):
  • Based on 10th Finance Commission.
  • Shifted to an “Alternative Scheme of Devolution” → 29% of certain Central taxes to States (retrospectively from 1996).
  • Made corporation tax, customs duties etc. shareable with States (like income tax).
• 101st Amendment Act (2016):
  • Introduced GST.
  • Subsumed multiple indirect taxes of Centre & States.
  • Created a common national market.
  • Established GST Council to recommend distribution.

Present Position of Tax Revenue Distribution

After these amendments, taxes are shared in six ways:

A. Levied by Centre, Collected & Appropriated by States (Art. 268)

• Example: Stamp duties on bills of exchange, insurance policies, transfer of shares, etc.
• These taxes are collected within a State and directly go to that State (not to Consolidated Fund of India).

B. Levied & Collected by Centre but Assigned to States (Art. 269)

• Example:
  • Inter-state sale of goods (CST before GST).
  • Consignment of goods during inter-state trade.
• Net proceeds are given entirely to States.

C. Inter-State GST (Art. 269A)

• Collected by Centre, but shared between Centre & States as per GST Council’s recommendation.
• Parliament decides rules about place of supply.

D. Levied & Collected by Centre, Shared with States (Art. 270)

• Most Union taxes (like income tax, corporation tax, customs).
• Distribution formula is decided by the Finance Commission and notified by the President.

E. Surcharge for Centre (Art. 271)

• Parliament can impose surcharges on taxes in Arts. 269 & 270.
• Proceeds go exclusively to Centre.
• Exception: No surcharge on GST.

F. Exclusive State Taxes

• 18 items in the State List, e.g.,
  • Land revenue, agricultural income tax, excise duty on liquor, electricity tax, vehicle tax, tolls, entertainment/amusement tax at local level.
  • Some taxes like sales of petroleum products & liquor are kept outside GST, so States retain revenue autonomy.

So far, we have studied allocation of taxing powers and distribution of tax revenues. But Centre–State financial relations are not limited to taxes. They also involve non-tax revenues, grants, GST Council, and the Finance Commission.

Distribution of Non-Tax Revenues

Apart from taxes, both Centre and States have non-tax sources:

A. Centre’s Non-Tax Revenues

• Posts & telegraphs
• Railways
• Banking
• Broadcasting (AIR, Doordarshan earlier; now public broadcasting)
• Coinage & currency
• Profits of Central PSUs (ONGC, SAIL, LIC etc.)
• Escheat & lapse (property of persons dying without heirs)
• Others

B. States’ Non-Tax Revenues

• Irrigation
• Forests
• Fisheries
• Profits of State PSUs
• Escheat & lapse (within the State)
• Others

Grants-in-Aid to States

Since States often lack adequate revenues to meet their expenditure responsibilities, the Constitution provides for Grants-in-aid from Centre to States.

(a) Statutory Grants (Article 275)

• Parliament may provide grants to States needing financial assistance.
• Charged on the Consolidated Fund of India.
• Not given to all States, only to needy ones.
• Can include special grants for Scheduled Tribes & Scheduled Areas.
• Recommended by the Finance Commission.

(b) Discretionary Grants (Article 282)

• Both Centre & States can give grants for any public purpose, even if outside their legislative competence.
• At Union level → Centre gives discretionary grants to States.
• Purpose:
  1. Help States meet plan targets.
  2. Give Centre some influence & coordination over State policies.
• Example: Grants for flagship schemes like PMGSY, NRHM, etc.

(c) Other Grants (Temporary)

• Constitution also provided special grants in lieu of export duties on jute & jute products for Assam, Bihar, Orissa, West Bengal.
• This was valid for 10 years (1950–1960).

Goods and Services Tax (GST) Council

(Article 279A, introduced by 101st Amendment, 2016)

GST is the biggest reform in fiscal federalism. For its smooth functioning, the Constitution created a GST Council.

• Constitution: By the President, through an order.
• Composition:
  • Union Finance Minister (Chairperson)
  • Union Minister of State (Finance)
  • Finance Ministers of all States
• Functions: Recommend to Centre & States on –
  • Taxes to be subsumed in GST.
  • Goods & services to be taxed or exempted.
  • Model GST laws, place of supply rules.
  • Threshold turnover for exemption.
  • GST rates (floor rates, bands).
  • Special rates during natural calamities/disasters.

👉 GST Council is a unique cooperative federal body – a platform where Centre & States work together in taxation.

Finance Commission

(Article 280)

The Finance Commission is the most important institution for maintaining financial balance between Centre and States.

• Constitutional Body → Appointed by the President every 5 years (or earlier).
• Nature → Quasi-judicial body.
• Functions:
  1. Recommend distribution of net tax proceeds between Centre & States (vertical devolution), and among States (horizontal distribution).
  2. Recommend principles for grants-in-aid from Centre to States.
  3. Suggest measures to augment State Consolidated Funds to support Panchayats & Municipalities (based on recommendations of State Finance Commissions).
  4. Any other matter referred by the President.
• Earlier Role (till 1960): Recommended amounts for States producing jute (in lieu of export duty share).

👉 Dr. Ambedkar called Finance Commission the “balancing wheel of fiscal federalism in India” – ensuring both Centre & States have adequate resources.

Protection of States’ Interests

The Constitution ensures that Parliament cannot arbitrarily pass financial laws affecting States. Certain Bills can be introduced in Parliament only with the President’s recommendation:

1. Bills imposing or altering any tax/duty in which States are interested.
2. Bills altering the definition of ‘agricultural income’ (important because agricultural income is a State subject).
3. Bills affecting the principles of distribution of revenues to States.
4. Bills imposing a surcharge on certain Central taxes for Union purposes.

📌 Meaning of “taxes/duties in which States are interested”:

• Where the whole or part of net proceeds is assigned to States.
• Or, where sums from net proceeds are payable to States.

👉 Net Proceeds = Gross proceeds of a tax – Cost of collection.

• Certified by the CAG of India, whose decision is final.

Borrowing Powers

Like in a federation, both Centre and States have borrowing powers:

• Centre (Article 292):
  • Can borrow within India or abroad, secured on Consolidated Fund of India.
  • Can give guarantees.
  • Parliament may set limits (though no law has been enacted).
• States (Article 293):
  • Can borrow only within India, secured on Consolidated Fund of the State.
  • Legislature of the State may fix limits.
  • States cannot borrow without Centre’s consent if:
    • They owe loans to Centre, or
    • Centre has guaranteed their previous loans.
• Centre–State loan relationship:
  • Centre can make loans to States.
  • These are charged on the Consolidated Fund of India.

Inter-Governmental Tax Immunities

To avoid financial conflicts, the Constitution provides mutual exemptions:

A. Union Property Exempt from State Taxes (Article 285)

• Union property is exempt from State or local taxation.
• But Parliament can remove this immunity.
• Applies whether property is used for sovereign or commercial purposes.
• Corporations/companies created by the Union are not exempt (as they are separate legal entities).

B. State Property & Income Exempt from Union Taxes (Article 289)

• Property and income of States exempt from Union taxation.
• But Parliament may tax the commercial activities of States.
• Exception: If Parliament declares that a trade/business is incidental to government functions, it won’t be taxed.

👉 Local bodies (municipalities, panchayats) and State corporations/companies are not exempt from Union taxation.

Judicial Interpretation:

• SC Advisory Opinion (1963): State immunity does not extend to customs or excise duties.
  • Example: Centre can impose customs duty on goods imported/exported by a State, or excise on goods manufactured by a State.

Effects of Emergencies on Financial Relations

During emergencies, Centre’s financial powers expand:

A. National Emergency (Art. 352)

• President can modify distribution of financial resources.
• May reduce or cancel transfers (tax sharing + grants-in-aid) to States.
• Change continues till end of financial year when emergency ceases.

B. Financial Emergency (Art. 360)

• Centre can direct States:
  1. To observe financial propriety.
  2. To reduce salaries/allowances of all classes of State employees (including High Court judges).
  3. To reserve all Money Bills for President’s consideration.

👉 This shows maximum centralisation in times of financial crisis.