Union–State Relations (Financial Relations)

Union–State Relations (Financial Relations)

Union–State Financial Relations (Part XII, Chapter I) (Articles 268–293)

Table of Contents

  1. Introduction
  2. Constitutional Framework
  3. Important Articles on Financial Relations
  4. Types of Taxes
  5. Distribution of Tax Revenue
  6. Taxes Levied by the Union but Collected by the States
  7. Taxes Levied and Collected by the Union but Assigned to States
  8. Goods and Services Tax (GST) & GST Council
  9. Grants-in-Aid
  10. Finance Commission
  11. Borrowing Powers of Union & States
  12. Inter-Governmental Financial Institutions
  13. Fiscal Challenges in Centre–State Relations
  14. Summary

1. Introduction

Financial relations determine how money, revenue, and resources are distributed between the Union and states in India.
India has a centralized federal financial structure, meaning:

  • Union controls major sources of revenue
  • States depend heavily on Union transfers

2. Constitutional Framework

Financial relations are covered under:

  • Part XII (Articles 264–293)
  • Seventh Schedule: Union, State & Concurrent Lists
  • Finance Commission Articles (Art. 280)
  • GST provisions (Art. 246A, 269A, 279A)

3. Important Articles on Financial Relations

ArticleSubject
268Duties levied by Union but collected by States
269Taxes levied & collected by Union but assigned to States
269AGST on inter-state supplies (IGST)
270Taxes levied & collected by Union but shared with States
271Surcharge on taxes for Union purposes
275Grants-in-aid from Union
280Finance Commission
281Recommendations of Finance Commission
282Discretionary grants
293State borrowing & Union control

4. Types of Taxes

(A) Union’s Exclusive Powers (List I)

Examples:

  • Income tax (corporate + non-agricultural)
  • Customs
  • Excise on non-alcoholic goods
  • GST (inter-state)
  • Corporation tax

(B) State’s Exclusive Powers (List II)

Examples:

  • State excise (alcohol)
  • Stamp duty (except those mentioned in Union List)
  • Land revenue
  • Taxes on vehicles
  • Electricity duty
  • GST (intra-state) except certain sectors

(C) Concurrent Powers (List III)

  • No taxes — Only administrative subjects are concurrent
  • Taxation powers are strictly in Union and State Lists

5. Distribution of Tax Revenue (Article 270)

Taxes shared between Union and States are called divisible pool taxes.
These include:

  • Income tax
  • Central GST portion
  • Union excise duties (except narcotics)

States receive a percentage of the divisible pool recommended by the Finance Commission.

15th Finance Commission (2021–26)

  • States’ share: 41% of the divisible pool

6. Taxes Levied by Union but Collected by the States (Art. 268)

Examples:

  • Stamp duties on financial documents
  • Excise duties on medical & toilet preparations containing alcohol

Revenue goes entirely to the states.

7. Taxes Levied and Collected by the Union but Assigned to the States (Art. 269)

Examples:

  • Taxes on sale or purchase of goods in inter-state trade (before GST)
  • Taxes on inter-state consignment (abolished after GST)

Now replaced by IGST under Art. 269A.

Revenue is distributed:

  • 50% to Union
  • 50% to concerned states

8. Goods and Services Tax (GST)

Articles related to GST:

  • 246A – Special power to legislate on GST
  • 269A – Levy & collection of IGST
  • 279A – GST Council

GST Structure

  • CGST – Central
  • SGST – State
  • IGST – For inter-state supplies
  • UTGST – Union Territories

GST Council (Art. 279A)

Members:

  • Union Finance Minister (Chairperson)
  • Union Minister of State (Finance)
  • Finance Ministers of all states

Decisions: ¾ majority

GST enhances:

  • Cooperative federalism
  • Shared fiscal responsibility

9. Grants-in-Aid

(A) Statutory Grants (Art. 275)

Given to:

  • Revenue-deficit states
  • Tribal & hill areas
  • Special needs

(B) Discretionary Grants (Art. 282)

Given at Union’s discretion for:

  • Disaster relief
  • Centrally Sponsored Schemes (CSS)
  • Infrastructure needs

(C) Special Grants

Given to newly formed states:

  • Telangana
  • Uttarakhand
  • Jharkhand

10. Finance Commission (Art. 280)

Constitutionally mandated body established every 5 years.

Functions:

  1. Distribution of divisible taxes
  2. Principles for grants-in-aid
  3. Measures to improve fiscal stability
  4. Review of state finances

Key Finance Commissions:

  • 1st Finance Commission (1951) – Allocation formulas
  • 14th Finance Commission – Raised states’ share from 32% to 42%
  • 15th Finance Commission – Reduced to 41% after creation of J&K UT

11. Borrowing Powers

Union Borrowing (Art. 292)

Can borrow:

  • Within India
  • From foreign sources

No constitutional limit.

State Borrowing (Art. 293)

States can borrow within India but:

  • Must take approval of Union if indebted to Union
  • Union may impose restrictions

12. Inter-Governmental Financial Institutions

  1. NITI Aayog
    • Replaced Planning Commission
    • Cooperative federalism
    • Resource allocation support
  2. GST Council
    • Joint decision-making on tax structure
  3. Finance Commission
    • Vertical & horizontal devolution

13. Fiscal Challenges in Centre–State Relations

  1. States’ limited taxation capacity
  2. Rising dependency on Union grants
  3. Delays in GST compensation
  4. Disputes in GST Council
  5. Conflict over cess and surcharge
  6. Demands for greater fiscal autonomy
  7. Rising debt burden of states

14. Summary

  • Financial relations described under Articles 268–293.
  • Union holds dominant financial powers.
  • States depend on shared taxes and grants.
  • GST reshaped tax administration and increased cooperation.
  • Finance Commission plays a crucial role in revenue-sharing.
  • Financial federalism remains a mix of cooperation and central control.

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