In addition to the above-mentioned constitutional devices, there are extra-constitutional devices to promote cooperation and coordination between the Centre and the states. These include a number of advisory bodies and conferences held at the Central level. Some of these are-

Centre-State Financial Relations

Financial division of powers is enumerated in Article 268 to Article 293 in Part XII of the constitution. It provides for division of taxation powers, distribution of tax and non tax revenues and allocation of grants in aid to the state for ensuring smooth functioning of fiscal federalism. 

Division of Taxation Powers in India

The Parliament and State governments enjoy exclusive powers to tax subjects in Union and State lists respectively. The Concurrent list does not have any subject related to tax legislation. But the Constitution (101st Amendment) Act, 2016 has made an exception by making a special provision for Goods and Services tax on which both Parliament and State legislatures can make laws. 

The residuary power of taxation lies exclusively with the Parliament. Under this, Parliament has imposed gift tax, wealth tax and expenditure tax. The Constitution also distinguishes between powers to levy and collect taxes and power to appropriate its proceeds. For example Income tax is levied and collected by centre while its collections are distributed between centre and state. 

Constitution has also placed certain restrictions on taxation power of the states which are as follows:

• Professional tax: A state legislature can impose taxes on professions, trades, callings and employments. But, the total amount of such taxes payable by any person should not exceed ₹2,500 per annum.
• Exclusive taxation by Parliament: ‘Only’ Parliament and not states are allowed to levy taxes (a) on sale or purchase of goods taking place outside the state or (b) in the course of import and exports of goods and services.  Further, the Parliament has the powers to lay down the principles for determining whether the supply of goods or services or both takes place outside the state, or in the course of import or export
• Taxation by State legislature: State legislature can impose tax on the consumption or sale of electricity. But, no tax can be imposed on the consumption or sale of electricity which is (a) consumed by the Centre or sold to the Centre; or (b) consumed in the construction, maintenance or operation of any railway by the Centre or by the concerned railway company or sold to the Centre or the railway company for the same purpose.
• Prior recommendation of the President: A state legislature can impose a tax in respect of any water or electricity stored, generated, consumed, distributed or sold by any authority established by Parliament with the purpose of regulating or developing any inter-state river or river valley. But, such a law, to be effective, needs prior sanction from the President. 

Centre-State Tax Revenue Distribution in India

Taxes imposed by the Union and the states can be divided into following categories-