Distribution of Revenues Between the Union and the States (Articles 268–281)

At a Glance

• What it is The constitutional scheme sharing taxes and non-tax revenues between the Centre and states
• Articles Articles 268 to 293 in Part XII, with 268 to 281 on revenue distribution
• Latest changes 80th Amendment (2000) and 101st Amendment (2016)
• Balancing body The Finance Commission
• Exam link UPSC Prelims, Polity: Funds with Government of India

Where Does It Fit?

This is the fourth topic of the category on Funds with the Government of India. Articles 268 to 293 in Part XII of the Constitution deal with Centre-state financial relations. The Constitution divides taxing powers and separates the power to levy a tax from the power to appropriate its proceeds.

Allocation of Taxing Powers

Parliament has exclusive power to levy taxes on subjects enumerated in the Union List (13 in number). The state legislature has exclusive power to levy taxes on subjects in the State List (18 in number). There are no tax entries in the Concurrent List, but the 101st Amendment Act of 2016 made an exception by conferring concurrent power on Parliament and state legislatures to make laws governing the goods and services tax. The residuary power of taxation is vested in Parliament; under it, Parliament has imposed gift tax, wealth tax and expenditure tax.

Distribution of Tax Revenues

The 80th and 101st Amendments

The 80th Amendment Act of 2000 gave effect to the recommendations of the 10th Finance Commission, that 29% of the total income from certain central taxes and duties should go to the states. This is known as the Alternative Scheme of Devolution and came into effect retrospectively from 1 April 1996. It brought several central taxes and duties such as Corporation Tax and Customs Duties at par with Income Tax for sharing with the states.

The 101st Amendment paved the way for GST. It gave concurrent power to Parliament and state legislatures to levy GST on every transaction of supply of goods or services or both. GST subsumed central indirect taxes such as Central Excise Duty, Additional Excise Duties, Service Tax, Additional Customs Duty (countervailing duty), Special Additional Duty of Customs and central surcharges and cesses, and state taxes such as VAT or sales tax, entertainment tax (other than that levied by local bodies), Central Sales Tax, octroi and entry tax, purchase tax, luxury tax, taxes on lottery, betting and gambling, and state surcharges and cesses relating to supply of goods and services. It deleted Article 268-A and Entry 92-C of the Union List, both on service tax, added earlier by the 88th Amendment Act of 2003.

Non-Tax Revenues and Grants

The major non-tax revenues of the Centre come from posts and telegraphs, railways, banking, broadcasting, coinage and currency, central public sector enterprises and escheat and lapse. The states earn from irrigation, forests, fisheries, state public sector enterprises and escheat and lapse. Besides tax sharing, the Constitution provides for grants-in-aid. Statutory grants under Article 275 are made to states in need of financial assistance, with different sums for different states, on the recommendation of the Finance Commission, and include specific grants for scheduled tribe welfare and scheduled area administration. Discretionary grants under Article 282 can be made by the Centre or states for any public purpose, even beyond their legislative competence, and the Centre is under no obligation to give them. A third temporary grant was made in lieu of export duty on jute to Assam, Bihar, Orissa and West Bengal for ten years.

Protection of State Interests and Borrowing

Certain bills can be introduced in Parliament only on the recommendation of the President: a bill that imposes or varies any tax or duty in which states are interested, one that varies the meaning of agricultural income, one that affects the principles of distribution of money to states, and one that imposes a surcharge for the Centre. The Centre can borrow within India or abroad upon the security of the Consolidated Fund within limits fixed by Parliament, whereas a state can borrow only within India. A state cannot raise a loan without the Centre’s consent if a Centre loan to it is outstanding. The property of the Union is exempt from state taxation and the property and income of a state is exempt from central taxation, subject to Parliament’s power to provide otherwise.

Why Is This Topic Important?

• Heavy Prelims content Articles 268 to 271 are favourite
• GST link The 101st Amendment changed the scheme
• Federal finance Core of Centre-state relations

What Came Next?

The next topic covers the Finance Commission under Article 280.

Key People and Terms

• Residuary power of taxation Vested in Parliament
• Alternative Scheme of Devolution 29% sharing, 80th Amendment
• Surcharge Extra tax kept by the Centre
• Statutory grants Article 275 grants to needy states
• Discretionary grants Article 282 grants

Exam Corner

Mains Angle

Questions on this topic usually ask whether fiscal federalism works. Use these points to add depth.

• Vertical imbalance The Centre has the broad tax base
• Transfers Tax sharing and grants
• GST Pooled sovereignty through the Council
• Autonomy Concerns on discretionary grants