The following points highlight the ten major conflicts between the Centre and the State.
1. In some cases the entire revenue is allocated among the States. But the rates and bases are wholly decided by the Centre regardless of the policies and desires of the States. This is virtual spoon-feeding of the States by the Centre.
2. Secondly, it is felt that the Centre has failed to take sufficient initiative to impose all the taxes as per Article 269, the entire net proceeds of which are supposed to be appropriated by the States.
3. The States make notable contribution to the development of the private corporate sector. They provide an integrated infrastructure for industrial development in the form of power, water, roads, land, factory sheds and even raw materials. Moreover, the State Governments have to provide huge amount of financial incentives and concessions to attract industries. Yet they were excluded from sharing the revenue of such taxes. This is unjust and unfair.
4. The Centre has replaced certain items, previously subject to State sale tax, by various excise duties. The wider coverage given to excise duties has added to the financial hardship of the States.
5. The allocable excise duties have been totally excluded from the allocable resource (or divisible pool). Moreover the Centre has deliberately raised the rates of these excise duties as also special and auxiliary duties. But the additional revenues collected from these sources are not to be shared with the States or to be shared in any small proportions. By contrast, the rates of those duties which are to be shared with the States have been kept at low levels for years together.
6. The contribution to the divisible pool made by income-tax (other than corporate tax) and Union excise duties is considered to be grossly inadequate to meet the revenue gap of the States. The present 85% allocation of income tax proceeds seems to have reached a ceiling. There is no scope for extending the coverage of the various excise duties either.
7. The conditional grants are treated as a tax on the States in the sense that they interfere with state priorities and create pressure on the States. On the contrary, unconditional grants virtually become financial deficit grants since they create considerable divergence between the power to spend and the need to tax.
8. Loans are given by the Centre to the State at concessional rates by extending overdraft facilities without any consideration of productivity and repayment capacity. These loans have been rising steadily over the entire plan period. Such loans are outside the scope of recommendations of the Finance Commissions. Hence the growth indebtedness of the States to the Centre is not a healthy development in the area of federal finance.
9. Originally, the railway passenger taxes were entirely appropriated by the States. But they were subsequently abolished. To compensate for the loss of revenue the Centre has arbitrarily fixed a grant in lieu of railway passenger tax.
10. The Central Government raised the exemption limit on income tax over the years. But it did not suffer much loss because it raised the surcharge on income tax. But the States had to lose because the proceeds of the surcharge were not shared with the States.