Distribution of Revenues Between Union and States under Part XII

The Constitution of India establishes a federal system in which financial powers and responsibilities are divided between the Union and the States. This division is essential to ensure that both levels of government have adequate resources to discharge their constitutional functions. Part XII of the Constitution, titled Finance, Property, Contracts and Suits, contains a detailed framework governing public finance in India. Within this Part, Articles 268 to 281 specifically deal with the distribution of revenues between the Union and the States.

These provisions lay down how taxes are to be levied, collected, shared, assigned, or distributed, and how grants-in-aid are to be provided. Over time, constitutional amendments—most notably the Eightieth Amendment and the One Hundred and First Amendment introducing the Goods and Services Tax (GST)—have reshaped this framework while retaining its basic federal character.

This article explains the constitutional scheme of revenue distribution in a clear and systematic manner, focusing on legislative intent, constitutional design, and institutional mechanisms.

Constitutional Philosophy Behind Revenue Distribution

India follows a system of fiscal federalism, where taxing powers are divided but financial resources are shared to maintain balance. The Union generally enjoys wider taxing powers, while the States bear significant expenditure responsibilities such as public health, law and order, and local governance.

The Constitution therefore adopts three broad approaches to revenue distribution:

1. Assignment of taxes exclusively to States after Union levy or collection
2. Sharing of taxes between the Union and the States
3. Grants-in-aid to States to correct fiscal imbalances

This framework aims to ensure equity among States, national economic unity, and cooperative federalism.

Key Provisions on Distribution of Revenues Between the Union and the States under Part XII

Article 268: Duties Levied by the Union but Collected and Appropriated by the States

Article 268 deals with certain stamp duties that are levied by the Union but collected by the States.

Key Features

• Stamp duties mentioned in the Union List are levied by the Government of India.
• In Union Territories, such duties are collected by the Union.
• In States, collection is done by the respective State governments.
• The proceeds collected within a State do not form part of the Consolidated Fund of India.
• Instead, they are assigned entirely to that State.

Significance

This arrangement allows uniform levy at the national level while ensuring that States retain the financial benefit. It reflects administrative convenience combined with fiscal decentralisation.

Article 268A (Omitted)

Article 268A earlier dealt with service tax being levied by the Union and shared with States. This provision was omitted by the Constitution (One Hundred and First Amendment) Act, 2016, following the introduction of GST, which subsumed service tax into a comprehensive indirect tax regime.

Article 269: Taxes Levied and Collected by the Union but Assigned to the States

Article 269 governs taxes on inter-State trade and commerce, excluding those now covered under GST.

Scope of Article 269

• Taxes on the sale or purchase of goods in the course of inter-State trade
• Taxes on the consignment of goods in inter-State movement

Such taxes are:

• Levied and collected by the Union Government
• Assigned to the States where the tax is leviable

The proceeds do not form part of the Consolidated Fund of India, except those attributable to Union Territories.

Parliamentary Role

Parliament is empowered to formulate principles:

• To determine when a sale or consignment occurs in inter-State trade
• To prescribe the manner of distribution among States

Constitutional Importance

Article 269 ensures that States receive revenue from economic activity occurring within their territories, even when transactions cross State boundaries.

Article 269A: Inter-State GST and Its Apportionment

Article 269A was inserted by the One Hundred and First Amendment to deal with GST on inter-State supplies.

Core Provisions

• GST on inter-State trade is levied and collected by the Union.
• The tax is apportioned between the Union and the States.
• Apportionment is done based on laws made by Parliament on the recommendations of the GST Council.

Special Rules

• Amounts apportioned to States do not form part of the Consolidated Fund of India.
• Cross-utilisation of GST credits between Union and States is constitutionally recognised.
• Parliament determines the place of supply, which is crucial for revenue allocation.

Impact

Article 269A marks a shift from origin-based to destination-based taxation, strengthening the concept of a unified national market.

Article 270: Taxes Levied and Distributed Between the Union and the States

Article 270 is the cornerstone of tax sharing in India.

Taxes Covered

• All Union taxes and duties except those under Articles 268, 269, and 269A
• Excludes surcharges under Article 271 and cesses levied for specific purposes

GST collected under Article 246A is also included within the distributable pool.

Distribution Mechanism

• A prescribed percentage of net proceeds is assigned to States.
• Distribution among States follows principles laid down by the President.
• After the constitution of the Finance Commission, these principles are based on its recommendations.

Role of the Finance Commission

The Finance Commission plays a critical role in recommending:

• Vertical distribution between the Union and States
• Horizontal distribution among States

Article 271: Surcharge on Union Taxes

Article 271 empowers Parliament to impose surcharges on certain Union taxes.

Features

• Surcharges are for Union purposes only.
• Entire proceeds go to the Consolidated Fund of India.
• GST is excluded from surcharge powers.

Effect on Federalism

Since surcharges are not shareable with States, frequent use of this power has raised concerns regarding fiscal autonomy of States.

Article 272 (Omitted)

Article 272 earlier allowed certain Union taxes to be shared with States. It was omitted by the Eightieth Amendment Act, 2000, which rationalised tax sharing under Article 270.

Article 273: Grants in Lieu of Export Duty on Jute

Article 273 provides for grants-in-aid to specific States in lieu of export duty on jute.

Beneficiary States

• Assam
• Bihar
• Odisha
• West Bengal

Nature of Grants

• Charged on the Consolidated Fund of India
• Time-bound and conditional on the continuation of export duty

This provision reflects historical economic considerations and regional equity.

Article 274: Prior Recommendation of the President

Article 274 acts as a constitutional safeguard for States’ financial interests.

Requirement

Certain Bills cannot be introduced in Parliament without the President’s recommendation if they:

• Impose or vary taxes shared with States
• Affect principles of revenue distribution
• Alter the definition of agricultural income

Purpose

This ensures that federal financial arrangements are not altered unilaterally.

Article 275: Grants from the Union to Certain States

Article 275 provides for general and specific grants-in-aid.

Objectives

• To assist States in need of financial support
• To promote welfare of Scheduled Tribes
• To improve administration of Scheduled Areas

Special provisions exist for Assam and autonomous States formed under Article 244A.

Significance

These grants address vertical and horizontal fiscal imbalances.

Article 276: Taxes on Professions, Trades, Callings and Employments

Article 276 allows States and local authorities to levy profession tax.

Key Points

• Such tax is not invalid merely because it resembles income tax.
• A monetary ceiling is imposed (currently ₹2,500 per annum).
• Parliament’s power to levy income tax remains unaffected.

This provision balances State revenue needs with taxpayer protection.

Article 277: Saving of Existing Taxes

Article 277 preserves continuity in taxation.

• Taxes lawfully levied before the Constitution continue until Parliament provides otherwise.
• Ensures smooth fiscal transition after constitutional commencement.

Article 279: Calculation of Net Proceeds

Article 279 defines net proceeds as tax revenue minus collection costs.

Role of the Comptroller and Auditor-General

The Comptroller and Auditor-General of India certifies:

• Net proceeds of taxes
• Attribution of proceeds to States

Such certification is final, ensuring transparency and accountability.

Article 279A: Goods and Services Tax Council

Article 279A establishes the Goods and Services Tax Council.

Composition

• Union Finance Minister as Chairperson
• Union Minister of State (Revenue/Finance)
• Finance Ministers of all States

Functions

• Recommend GST rates, exemptions, and thresholds
• Decide principles of levy and apportionment
• Promote harmonisation of GST laws

Decision-Making

• Weighted voting system
• Union has one-third weight
• States collectively have two-thirds weight

This institutional structure embodies cooperative federalism.

Article 280: Finance Commission

Article 280 provides for the constitution of the Finance Commission every five years.

Functions

• Recommend tax distribution between Union and States
• Suggest grants-in-aid principles
• Advise on funding of Panchayats and Municipalities
• Address any other financial matter referred by the President

The Commission acts as an impartial arbiter in fiscal federalism.

Article 281: Recommendations of the Finance Commission

Article 281 ensures parliamentary oversight.

• Finance Commission recommendations are laid before Parliament.
• An explanatory memorandum on action taken accompanies them.

This promotes transparency and democratic accountability.

Conclusion

Articles 268 to 281 of the Constitution form a comprehensive and balanced framework for revenue distribution between the Union and the States. They combine legal precision with fiscal flexibility, allowing India to function as a strong yet cooperative federation. 

While constitutional amendments such as the introduction of GST have transformed revenue sharing mechanisms, the foundational principles of equity, coordination, and federal balance continue to guide India’s fiscal structure.