Part XII: Finance, Property, Contracts and Suits
Contains comprehensive provisions governing the financial relations between the Union and the States, management of public funds, borrowing powers, and legal matters related to property, contracts, and suits involving the government. This part establishes the fiscal framework of the Indian federation and the legal procedures applicable to government transactions.
Chapter I: Finance
Taxes not to be imposed save by authority of law
No tax shall be levied or collected except by authority of law. This fundamental principle establishes that taxation requires legislative sanction and cannot be imposed arbitrarily by the executive.
Consolidated Funds and public accounts of India and of the States
(1) All revenues received, all loans raised, and all moneys received in repayment of loans by the Government of India form the Consolidated Fund of India. Similarly for States. (2) All other public money forms the Public Account. No money can be withdrawn from the Consolidated Fund except under appropriation made by law.
Duties levied by the Union but collected and appropriated by the States
Stamp duties and duties of excise on medicinal and toilet preparations mentioned in the Union List shall be levied by the Government of India but collected and appropriated by the States within which they are levied.
Taxes levied and collected by the Union but assigned to the States
Taxes on the sale or purchase of goods (other than newspapers) and taxes on the consignment of goods where such sale/purchase/consignment takes place in the course of inter-State trade or commerce shall be levied and collected by the Government of India but shall be assigned to the States.
Taxes levied and collected by the Union and distributed between the Union and the States
All taxes and duties referred to in the Union List, except the duties and taxes referred to in articles 268, 269 and 269A, shall be levied and collected by the Government of India and shall be distributed between the Union and the States in the manner provided in clause (2).
Grants from the Union to certain States
Parliament may by law provide for the payment of grants-in-aid to States which are in need of assistance, and different sums may be fixed for different States. Special provisions exist for grants to promote the welfare of Scheduled Tribes and administration of Scheduled Areas.
Finance Commission
The President shall constitute a Finance Commission every five years or earlier to make recommendations on: (a) distribution of net proceeds of taxes between Union and States; (b) principles governing grants-in-aid; (c) measures needed to augment State Consolidated Funds; (d) any other matter referred by the President.
Recommendations of the Finance Commission
The President shall cause every recommendation made by the Finance Commission to be laid before each House of Parliament, together with an explanatory memorandum as to the action taken thereon.
Expenditure defrayable by the Union or a State out of its revenues
The Union or a State may make any grants for any public purpose, notwithstanding that the purpose is not one with respect to which Parliament or the Legislature of the State, as the case may be, may make laws.
Exemption of property of the Union from State taxation
The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State. However, Parliament may by law provide for the taxation of Union property in particular cases.
Exemption of property and income of a State from Union taxation
The property and income of a State shall be exempt from Union taxation. However, Parliament may by law provide for the taxation of trade or business carried on by, or on behalf of, a State, or of operations connected therewith, or of property used or occupied for such trade or business.
Borrowing by the Government of India
The executive power of the Union extends to borrowing upon the security of the Consolidated Fund of India within such limits, if any, as may from time to time be fixed by Parliament by law and to the giving of guarantees within such limits, if any, as may be so fixed.
Borrowing by States
(1) A State may borrow within India upon the security of its Consolidated Fund. (2) The Government of India may make loans to States. (3) A State cannot raise any loan without the consent of the Government of India if there is still outstanding any part of a loan made to the State by the Government of India.
Chapter II: Borrowing
This chapter (Articles 292-293) deals with the borrowing powers of the Union and States. The provisions ensure fiscal discipline while allowing both levels of government to raise funds for development and other purposes. Key articles from this chapter are already included in the Finance section above.
Chapter III: Property, Contracts, Rights, Liabilities, Obligations and Suits
Succession to property, assets, rights, liabilities and obligations in certain cases
As from the commencement of this Constitution, all property and assets which immediately before such commencement were vested in the Government of an Indian State corresponding to a State specified in Part B of the First Schedule shall vest in the Government of India, if the purposes for which such property and assets were held immediately before such commencement will thereafter be purposes of the Government of India relating to any of the matters enumerated in the Union List.
Succession to property, assets, rights, liabilities and obligations in other cases
(1) As from the commencement of this Constitution, all property and assets which immediately before such commencement were vested in any Indian State corresponding to a State specified in Part B of the First Schedule shall vest in the State. (2) The Government of India or the Government of a State shall be liable for the liabilities of the corresponding Government in existence before the commencement of this Constitution.
Things of value within territorial waters or continental shelf and resources of the exclusive economic zone to vest in the Union
All lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or the exclusive economic zone, of India shall vest in the Union and be held for the purposes of the Union. All other resources of the exclusive economic zone shall also vest in the Union.
Power to carry on trade, etc.
The executive power of the Union and of each State shall extend to the carrying on of any trade or business and to the acquisition, holding and disposal of property and the making of contracts for any purpose. However, the Union or State cannot carry on trade if it infringes on the legislative powers of the other.
Contracts
(1) All contracts made in the exercise of the executive power of the Union or of a State shall be expressed to be made by the President, or by the Governor, and shall be executed on behalf of the President or Governor by such persons and in such manner as he may direct or authorize. (2) Neither the President nor the Governor shall be personally liable in respect of any contract or assurance made or executed for the purposes of this Constitution.
Suits and proceedings
The Government of India may sue or be sued by the name of the Union of India and the Government of a State may sue or be sued by the name of the State. The same provisions apply to suits and proceedings by or against the Government of India or the Government of a State as would apply if the corresponding Dominion or Province were a private person.
Persons not to be deprived of property save by authority of law
No person shall be deprived of his property save by authority of law. [Inserted by the 44th Amendment Act, 1978]. This article protects the right to property as a constitutional right (though no longer a fundamental right) and ensures that private property cannot be taken without legislative sanction.
💰 Key Financial Framework of Part XII
Public Funds (Articles 266-267)
- Consolidated Fund: All government revenues, loans, and loan repayments.
- Contingency Fund: For unforeseen expenditures (Art. 267).
- Public Account: Other public money like provident funds, deposits.
Tax Distribution (Arts. 268-273)
- Union Levied, State Collected: Stamp duties, excise on medicines.
- Union Levied & Collected, Assigned to States: GST on inter-state trade.
- Shared Taxes: Income tax, Central GST (distributed by Finance Commission).
Constitutional Bodies (Articles 280-281)
- Finance Commission: Constituted every 5 years to recommend tax devolution.
- Public Accounts Committee: Parliamentary committee to audit government spending.
- Comptroller & Auditor General: Audits all government accounts (Art. 148).
📝 Constitutional Significance
Part XII establishes the fiscal foundation of Indian federalism. It creates a sophisticated system for resource sharing between the Union and States while maintaining the Union's primacy in national economic matters. The creation of the Finance Commission (Art. 280) institutionalizes cooperative federalism by providing a regular, constitutional mechanism for resolving fiscal disputes. The provisions for borrowing (Arts. 292-293) balance State autonomy with fiscal responsibility, while Chapter III clarifies the legal status of government property, contracts, and liabilities, ensuring governmental functions can proceed with legal certainty.
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