Besides detailed provisions on financial-legislative powers in the seventh schedule, Chapters I and II of Part XII of the Constitution deal with finance and borrowing systems of the Union and the state governments, respectively. Articles 268 to 281 lay down the scheme of distribution of revenues between the Union and the state governments. Articles 268, 269, 269A and 270 are the most crucial to this scheme.
One of the guiding motivations behind centralization of Indian federalism was the desire for economic integration. At the time of the drafting of the Constitution there seems to have been an understanding that major industries would be in the domain of the Union—key industries, defence and the industries declared by Parliament to be of national interest, in particular being of the Union’s concern. The rest of industry, and agriculture would belong to the domain of the states.
According to Article 268, such stamp duties as are mentioned in the Union list are levied by the Union but collected by and assigned to the respective states. Article 269 provides that taxes on the sale and purchase of goods and taxes on the consignment of goods except as provided in article 269A shall be levied and collected by the Union but shall be assigned and shall be deemed to have been assigned to the states on or after the 1st day of April 1996 and distributed among these states in accordance with such principles of distribution as may be formulated by Parliament by law.
According to the newly inserted article 269A, which was inserted in September 2016, goods and services tax on supplies in the course of inter-state trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.
Further, Article 270 provides that all taxes and duties referred to in the Union List, except the duties and taxes referred to in articles 268, 269 and 269A, respectively, surcharge on taxes and duties referred to in article 271 and any cess levied for specific purposes under any law made by Parliament shall be levied and collected by the Government of India and shall be distributed between the Union and the States considering the recommendations of the Finance Commission. The tax collected by the Union under clause (1) of article 246A shall also be distributed between the Union and the States considering the recommendations of the Finance Commission. The tax levied and collected by the Union under clause (2) of article 246A and article 269A, which has been used for payment of the tax levied by the Union under clause (1) of article 246A, and the amount apportioned to the Union under clause (1) of article 269A, shall also be distributed between the Union and the States considering the recommendations of the Finance Commission. However, article 271 empowers Parliament to increase the surcharges for the purposes of the Union and the whole proceeds of any such surcharge will go to the Union.
Article 275 provides for grants-in-aid by the Union to the States that, according to Parliament, need assistance and different amounts of assistance may be allotted. Such sums are charged on the consolidated fund of India. Special stress is laid on assistance in undertaking Union-supported schemes for scheduled castes and scheduled tribes and administration of tribal areas in Assam. In terms of article 280, there is a crucial role assigned to the finance commission, appointed by the President every five years, in the recommendation of revenue shares and grants in aid. The commission also recommends measures to supplement the resources of the local bodies.
Following the commencement of the constitution a number of constitutional amendments increased centralism, particularly in the economic sphere, with the states complaining of financial crunch until the end of last century. However, from the year 2000 onwards this trend has reversed. The states have gained in money successively through enhanced devolution by Finance Commissions and implementation of the Goods and Services Tax regime.
The devolution of taxes and duties and grants to States is based on the 15th Finance Commission recommendation that the Centre share 41 per cent of the net proceeds of taxes with the States, against the present 42 per cent. It also suggested that the Centre retain financial resources equivalent to 1 per cent of the net proceeds of taxes with itself, for financing the requirements of the newly formed Union Territories of Jammu & Kashmir and Ladakh.
The Finance Commission follows a horizontal devolution formula to arrive at tax devolution.
