States are empowered to levy and collect taxes on items listed in the State List of Schedule 7. The proceeds are completely retained by the states and will become part of the Consolidated Fund of the State.

Taxes Levied And Collected And Retained By The States - Constitutional Provisions

• Article 276 talks about the taxes that are levied by the state government, governed by the state government and the taxes are collected also by the state government.
• But the taxes levied are not uniform across the different states and may vary. These are sales tax and VAT, professional tax and stamp duty to name a few.

Is There A Limit On Taxation By The State?

• The State can’t tax beyond a permissible limit.
• In the case of Commissioner, Quilon vs M/S. Harrisons & Crosfield Ltd,1964, the Kerala Government imposed Kerala Profession Tax, 1958 which was held ultra vires by the Supreme Court of India.
• As the Kerala legislature was incompetent to impose a tax exceeding the permissible limit. Thus, being violative of Article 276 was held unconstitutional accordingly.

What Will Happen If There Is An Overlap With The Union List?

In the Case of B.M. Lakhani v. Municipal Committee,1970, two important observations were made by the Supreme Court that are as follows:

• The suit for refund of money paid in excess of the amount prescribed under Article 276 is maintainable in law.
• Though there is a limitation or cap on the amount of tax to be levied no such bar exists on the exercise of this power by the state or local bodies. Further despite the fact that the subject of income tax is mentioned in the Union list. But the Constitution allows such overlapping under Article 276.

Conclusion

Taxes that are levied by the state government are the ones on which they have the freedom to decide the amount of taxation. These taxes are levied, collected and retained by the state government. These are the taxes, the rates of which tend to differ from one state to another and have, as their most common example, the VAT and the Professional Tax.

FAQs

Question. What are the main types of taxes levied by the states in India?

Question. How is the revenue from taxes distributed between the Central and State Governments?

Question. What is the role of the Finance Commission in the allocation of taxes?

Question. What taxes are exclusively under the jurisdiction of the states?

Question. How does the GST affect the taxation system in states?

MCQs

1. Which of the following taxes is exclusively levied by the states in India?

A) Income Tax

B) Goods and Services Tax

C) Sales Tax (or VAT)

D) Corporation Tax

2. Which body recommends the distribution of taxes between the Central and State Governments in India?

A) Planning Commission

B) Reserve Bank of India

C) Finance Commission

D) Election Commission

3. Which of the following taxes is levied by the state governments under the GST regime?

A) CGST

B) SGST

C) VAT

D) Excise Duty on Alcohol

4. Which of the following taxes is levied by local bodies within states?

A) Sales Tax

B) Property Tax

C) Income Tax

D) Corporation Tax

5. The Finance Commission allocates taxes based on which of the following criteria?

A) Per capita income of the states

B) Population, needs, and performance of states

C) Agricultural output of states

D) Industrial development of states

GS Mains Questions and Model Answers

Q1: Examine the distribution of fiscal powers between the Central and State Governments in India, focusing on the taxation system.

Answer: The Indian Constitution provides for a federal structure where fiscal powers are shared between the Central Government and State Governments. The Constitution divides the powers into three lists: the Union List, the State List, and the Concurrent List. The Union List contains taxes that can be levied by the central government, such as Income Tax, Customs Duty, and Corporation Tax. The State List allows states to levy taxes like Sales Tax (VAT), Stamp Duty, and Excise Duty on alcohol. The Concurrent List includes taxes that both the Centre and States can levy, such as Goods and Services Tax (GST). The Finance Commission plays a crucial role in the allocation of taxes and grants between the Centre and the States, based on population, needs, and fiscal performance. The GST has altered the tax landscape by creating a dual tax system where both the Centre and States share the revenue from goods and services.

Q2: Discuss the impact of GST on the states’ revenue generation and the shifting of fiscal powers.

Answer: The introduction of the Goods and Services Tax (GST) has significantly changed the way states generate revenue. Prior to GST, states had the authority to levy Sales Tax (VAT), which was a major source of revenue. With the implementation of GST, states now share the revenue with the Centre through the SGST and CGST system. While this has simplified the taxation process by eliminating multiple taxes, it has also led to a reduction in the states' control over indirect taxes. Some states initially expressed concerns over the potential revenue loss, especially those with a high reliance on excise duties and sales tax. However, the compensation mechanism, provided by the Centre for the first five years, helped mitigate this impact. Over time, states have benefited from a broader tax base and have been able to claim a larger share of the national economy under the GST system. The implementation of GST has led to a shift in fiscal powers, with the states gaining some financial autonomy, but also facing challenges in revenue generation due to the new system.

Q3: Evaluate the role of the Finance Commission in maintaining fiscal federalism in India.

Answer: The Finance Commission plays a pivotal role in maintaining fiscal federalism in India by recommending the distribution of tax revenues between the Central Government and the State Governments. It ensures that the states receive a fair share of the resources required to fund their development activities and meet their fiscal responsibilities. The Commission’s recommendations are based on criteria such as population, needs, and performance, ensuring that economically weaker states receive adequate financial support. The Finance Commission also recommends grants-in-aid to states that face special challenges, such as those with difficult geographical conditions or lower revenue generation capacity. Through its role, the Commission helps maintain a balance between the centralizing tendencies of the Union Government and the financial autonomy of the states, ensuring equitable development across the country. By fostering fiscal cooperation and fair resource allocation, the Finance Commission strengthens the federal structure and promotes fiscal sustainability in India.

Previous Year Questions on Taxes Levied and Collected by the States

1. UPSC 2021

Question: Discuss the role of the Finance Commission in the distribution of fiscal resources between the Centre and the States.

Answer: This question required candidates to discuss the function of the Finance Commission in recommending the allocation of resources, particularly the distribution of central taxes between the Centre and the States, and how it maintains fiscal balance in the federal system.

2. UPSC 2020

Question: Analyze the impact of the Goods and Services Tax (GST) on the taxation system of India and its effects on state revenue.

Answer: This question required an analysis of how GST changed the taxation system by centralizing the taxation of goods and services, the implications for state revenue, and how the compensation mechanism addressed potential revenue losses for states.

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