Financial Relations Practice Questions
20 free Financial Relations practice questions for the Indian Polity. Tap an option to answer — you get instant feedback, the correct answer, and a detailed explanation for every question.
Which Articles of the Indian Constitution deal with the financial relations between the Centre and the States?
- A Articles 245 to 255
- B Articles 256 to 263
- C Articles 301 to 307
- D Articles 268 to 293
Correct answer: Articles 268 to 293
Financial relations between the Centre and the States are detailed in Part XII of the Constitution, specifically from Article 268 to 293. These provisions cover the distribution of taxes, grants-in-aid, and borrowing powers.
Which constitutional body is responsible for recommending the distribution of net proceeds of taxes between the Centre and the States?
- A Finance Commission
- B NITI Aayog
- C GST Council
- D Inter-State Council
Correct answer: Finance Commission
Article 280 provides for a Finance Commission every five years to recommend the principles governing the distribution of tax proceeds. It acts as a balancing wheel of fiscal federalism in India.
Under the GST regime, who has the power to make recommendations on tax rates, exemptions, and floor prices?
- A The Union Finance Minister acting alone
- B The Finance Commission of India
- C The Parliament of India alone
- D The Goods and Services Tax Council
Correct answer: The Goods and Services Tax Council
The GST Council, established under Article 279A, is a joint forum of the Centre and the States. It makes recommendations on all vital aspects of GST to ensure a harmonized national market.
Which Article provides for 'Statutory Grants' to the states out of the Consolidated Fund of India?
- A Article 275
- B Article 282
- C Article 265
- D Article 293
Correct answer: Article 275
Article 275 empowers the Parliament to make grants to the states which are in need of financial assistance. These are known as statutory grants and are given on the recommendation of the Finance Commission.
The power to levy 'Taxes on Income' other than agricultural income is vested in:
- A The Union Government
- B The State Governments
- C Both Union and State Governments
- D The Local Bodies
Correct answer: The Union Government
In the Seventh Schedule, Entry 82 of the Union List gives the Parliament the exclusive power to tax income other than agricultural income. Agricultural income tax is a subject under the State List.
Which Article states that 'No tax shall be levied or collected except by authority of law'?
- A Article 265
- B Article 266
- C Article 267
- D Article 300
Correct answer: Article 265
Article 265 provides a constitutional safeguard against arbitrary taxation by the executive. It ensures that any tax imposed must have the backing of a valid law passed by the legislature.
Which tax was entirely abolished and subsumed under the Goods and Services Tax (GST) in 2017?
- A Personal Income Tax
- B Corporation Tax
- C Central Sales Tax
- D Basic Customs Duty
Correct answer: Central Sales Tax
Central Sales Tax, along with various other indirect taxes like VAT and Service Tax, was subsumed into GST to eliminate the cascading effect of taxes. Customs duty remains a separate Union tax.
The 'Discretionary Grants' given by the Centre or States for any public purpose fall under:
- A Article 275
- B Article 280
- C Article 282
- D Article 292
Correct answer: Article 282
Article 282 provides that the Union or a State may make any grants for any public purpose, even if the purpose is not within its respective legislative competence. These are known as discretionary grants.
Who can levy and collect the Goods and Services Tax on supplies in the course of inter-state trade or commerce?
- A The exporting State
- B The importing State
- C The Government of India
- D The GST Council directly
Correct answer: The Government of India
Under Article 269A, IGST on inter-state supplies is levied and collected by the Government of India. The tax is then apportioned between the Union and the States as per the recommendations of the GST Council.
A State Government can borrow money from outside India only with the consent of:
- A The Parliament
- B The President of India
- C The Government of India
- D The Reserve Bank of India
Correct answer: The Government of India
Under Article 293, a State cannot raise any loan from outside India. Furthermore, it must obtain the consent of the Government of India to raise any loan if there is still outstanding any part of a loan previously granted by the Union.
Which Article provides for the 'Contingency Fund of India' to meet unforeseen expenditure?
- A Article 266
- B Article 267
- C Article 268
- D Article 280
Correct answer: Article 267
Article 267 authorizes the Parliament to establish a Contingency Fund of India. This fund is placed at the disposal of the President to enable advances to be made for meeting unforeseen expenditure pending authorization by Parliament.
The net proceeds of which taxes are NOT shared with the States?
- A Personal Income Tax
- B Corporation Tax Revenue
- C Surcharges and Cesses
- D Central Excise Duty on Tobacco
Correct answer: Surcharges and Cesses
Under Article 271, the Parliament can levy a surcharge on certain taxes for the purposes of the Union. The proceeds of such surcharges and cesses go exclusively to the Centre and are not shared with the States.
Which amendment act introduced the Goods and Services Tax (GST) in India?
- A 100th Amendment Act
- B 101st Amendment Act
- C 102nd Amendment Act
- D 103rd Amendment Act
Correct answer: 101st Amendment Act
The 101st Constitutional Amendment Act, 2016, paved the way for the implementation of GST. It granted concurrent powers to both Parliament and State Legislatures to make laws with respect to GST.
Which Article deals with the 'Custody of Consolidated Funds' and the payment of moneys into such funds?
- A Article 266
- B Article 283
- C Article 265
- D Article 292
Correct answer: Article 283
While Article 266 defines the funds, Article 283 regulates the custody of the Consolidated Fund, the Contingency Fund, and moneys credited to the public accounts. It ensures these funds are managed according to laws made by the legislature.
The property of the Union is exempt from all taxes imposed by a State or any authority within a State under:
- A Article 285
- B Article 287
- C Article 289
- D Article 291
Correct answer: Article 285
Article 285 provides that the property of the Union shall be exempt from all taxes imposed by a State or any authority within a State (like municipalities). However, Parliament can provide otherwise by law.
Conversely, the property and income of a State are exempt from Union taxation under which Article?
- A Article 285
- B Article 289
- C Article 300
- D Article 301
Correct answer: Article 289
Article 289 provides immunity to State property and income from Union taxation. However, this immunity does not extend to trade or business carried on by the State unless Parliament declares it incidental to ordinary functions of government.
During a Financial Emergency (Article 360), the Union executive can direct the States to:
- A Increase the tax rates immediately
- B Observe canons of financial propriety
- C Transfer all state funds to the Centre
- D Abolish the State Finance Commission
Correct answer: Observe canons of financial propriety
During a Financial Emergency, the President can issue directions to states to follow financial rules. This includes the reduction of salaries of state employees and the reservation of all money bills for the President's consideration.
Stamp duties on bills of exchange and promissory notes are levied by the Centre but collected and appropriated by:
- A The Union Government
- B The Reserve Bank of India
- C The State Governments
- D The Commercial Banks
Correct answer: The State Governments
Under Article 268, certain duties like stamp duties are levied by the Union but are collected and kept by the States within which such duties are leviable. These proceeds do not form part of the Consolidated Fund of India.
Which body ensures that the financial interests of the Panchayats and Municipalities are protected via state resources?
- A The Union Finance Commission
- B The State Finance Commission
- C The District Planning Committee
- D The NITI Aayog
Correct answer: The State Finance Commission
Under Articles 243-I and 243-Y, the Governor constitutes a State Finance Commission every five years. It recommends the distribution of taxes between the state and local bodies and measures to improve their financial position.
The 'Vertical Devolution' in the context of the Finance Commission refers to:
- A Sharing of taxes among the different States
- B Allocation of funds to Local Bodies by the State
- C Distribution of grants-in-aid to specific sectors
- D Tax proceeds shared between Centre and States
Correct answer: Tax proceeds shared between Centre and States
Vertical devolution is the percentage of the divisible pool of central taxes that is shared with the states as a whole. Horizontal devolution, on the other hand, is the formula used to distribute that share among individual states.