Distribution of Revenues Between Union and States
Centre-state revenue distribution explains how Articles 268, 270, 280 and 243-I split tax revenues between the Union, States, and panchayats.
At a glance
The constitutional scheme for levying, collecting, and sharing tax revenues between the Union and the States, chiefly under Articles 268-280.
Article 270 distributes Union List taxes (except Articles 268, 269, 269A) between the Union and States per Finance Commission recommendations.
Lets a single, uniformly administered tax base fund both levels of government without duplicate tax machinery, while a periodic Finance Commission keeps the split fair.
Centre-state revenue distribution is the constitutional scheme, laid down mainly in Part XII of the Constitution, that decides how tax revenues collected across the country are levied, collected, and shared between the Union government and the States. It rests on a mix of fixed constitutional rules — such as duties the Union levies but the States collect — and a periodic, expert-driven mechanism, the Finance Commission, that recommends how the shared pool of taxes should actually be split.
Legislative Backdrop: The Seventh Schedule
Revenue distribution cannot be separated from the distribution of legislative power. Article 246 read with the Seventh Schedule divides subjects into three lists: the Union List (98 subjects), the State List (59 items), and the Concurrent List (52 items). Any subject not mentioned in any list falls to Parliament under the residuary power in Article 248. This division matters for revenue-sharing because it also determines who has the constitutional authority to impose a particular tax or duty in the first place.
Where a Union law and a State law on a Concurrent List subject conflict, Article 254(2) generally gives the Union law primacy. A State law can still prevail in that State if it was reserved for the President's consideration and received presidential assent — but Parliament retains the power to override it later through fresh legislation. This shapes how confidently a State can rely on its own fiscal legislation in areas Parliament also touches.
Duties the Union Levies but the States Collect
Certain stamp duties mentioned in the Union List are levied by the Government of India, but collection is handled differently depending on where the transaction occurs — within a Union territory, the Government of India itself collects them, while in other cases the collecting authority is the State government concerned. This lets the Union retain the power to legislate on the duty while keeping the administrative task, and typically the resulting proceeds, closer to where the transaction took place.
Taxes Levied and Distributed Between the Union and the States
The core sharing mechanism is Article 270. Taxes and duties referred to in the Union List — other than those specifically carved out under Articles 268, 269, and 269A — are levied and collected by the Union but distributed between the Union and the States according to rules Parliament makes by law. In practice, a prescribed percentage of this divisible pool is assigned to the States. This is what allows a single, uniformly administered tax base to still fund both levels of government, rather than requiring the Union and States to maintain separate, overlapping tax machinery.
The Finance Commission's Role
Article 280 requires the President to constitute a Finance Commission at the end of every fifth year (or earlier, if necessary). The Commission reviews the financial position of the Union and the States and recommends the distribution of revenues between them, along with the principles governing grants-in-aid to States. Because Article 270 leaves the exact sharing percentages to be worked out periodically, the Finance Commission is the body that supplies those numbers for Parliament to act on — the practical bridge between the constitutional text and the real fiscal transfers that occur every few years.
State Finance Commissions and Local Bodies
Revenue distribution does not stop at the Union-State level. Article 243-I extends the same logic downward: the Governor of a State must constitute a State Finance Commission after every five years to review the financial position of panchayats and recommend how taxes, duties, and fees should be distributed between the State and its panchayats, as well as the principles governing grants-in-aid from the State's Consolidated Fund. This creates a State-level tier of periodic fiscal review that mirrors the Union-level Finance Commission under Article 280, extending fiscal federalism down to local self-government.
Resolving Union-State Disputes
Because revenue and power are both divided by the Constitution, disagreements between the Union and the States — or among States themselves — are inevitable. Article 131 vests the Supreme Court with original and exclusive jurisdiction over such disputes, whether between the Union and one or more States or between States inter se, excluding disputes arising out of a treaty or similar instrument entered into before the Constitution came into force. It gives the Union-State fiscal relationship a judicial forum of last resort, distinct from the Finance Commission's advisory, non-adjudicatory role.
Effect of a National Emergency
The ordinary revenue-distribution scheme is not immune to Emergency conditions. Once a Proclamation of Emergency under Article 352 is in force, the normal federal distribution of power is effectively suspended, and authority becomes far more concentrated in the Union government — an extraordinary, temporary departure from the federal design. India has experienced this only once, during the 21-month Emergency from June 1975 to January 1977. (The specific mechanism for modifying revenue-sharing rules during an Emergency is a separate provision, covered in more depth elsewhere.)
Key Articles at a Glance
| Article | What it deals with |
|---|---|
| 131 | Supreme Court's original jurisdiction over Union-State and inter-State disputes |
| 243-I | State Finance Commission for reviewing State-panchayat revenue distribution |
| 246 & Seventh Schedule | Division of legislative power via Union, State, and Concurrent Lists |
| 248 | Residuary legislative power vested in the Union |
| 254(2) | Resolution of Union-State law conflicts on Concurrent List subjects |
| 268 | Duties levied by the Union, collected by the Union or the States |
| 270 | Union List taxes levied by the Union, distributed with the States per Finance Commission recommendations |
| 280 | Finance Commission constituted every five years to recommend revenue distribution |
UPSC Relevance
Prelims
- Know the numeric composition of the Seventh Schedule: 98 Union List subjects, 59 State List, 52 Concurrent List.
- Article 270 excludes taxes under Articles 268, 269, and 269A from the shared divisible pool.
- The Finance Commission (Article 280) and the State Finance Commission (Article 243-I) are both constituted every five years, but at different levels.
- Article 131 is the source of the Supreme Court's original jurisdiction over Centre-State disputes.
Mains
- Discuss the constitutional mechanisms — legislative and fiscal — through which India balances Union authority with State autonomy in revenue matters.
- Examine the role of the Finance Commission in operationalising the constitutional scheme of Centre-State revenue distribution under Article 270.
- Analyse how emergency conditions under Article 352 affect the ordinary federal distribution of power and revenue.
FAQ
Q1. Which article is the primary basis for sharing Union List taxes between the Centre and the States? Article 270. It provides that Union List taxes, other than those under Articles 268, 269, and 269A, are levied and collected by the Union but distributed between the Union and the States as Parliament prescribes by law, based on Finance Commission recommendations.
Q2. What is the difference between Article 268 and Article 270? Article 268 covers Union-List duties (such as certain stamp duties) that the Union levies but that are collected by the Union or the State depending on where the transaction occurs. Article 270 covers the broader pool of Union taxes that are levied, collected, and then distributed between the Union and the States according to a prescribed percentage.
Q3. How often is the Finance Commission constituted, and what does it recommend? Under Article 280, the President constitutes a Finance Commission at the end of every fifth year (or earlier). It reviews the Union's and States' financial position and recommends the distribution of revenues and the principles for grants-in-aid to States.
Q4. Is there a similar body for revenue-sharing between States and panchayats? Yes. Article 243-I requires the Governor to constitute a State Finance Commission every five years to recommend how taxes, duties, and fees should be distributed between the State and its panchayats.
Q5. Which court resolves disputes between the Union and the States over such matters? The Supreme Court, under its original and exclusive jurisdiction granted by Article 131, which covers disputes between the Union and one or more States, and between States inter se (excluding certain pre-Constitution treaty disputes).
Quick Revision
- Article 246 & Seventh Schedule: Union List (98), State List (59), Concurrent List (52); residuary power with the Union (Article 248).
- Article 254(2): Union law prevails over State law on Concurrent List conflicts, subject to the reserved-and-assented exception, itself overridable by later Parliament legislation.
- Article 268: Union-levied duties collected by the Union (Union territories) or the States (other cases).
- Article 270: Union List taxes (except 268, 269, 269A) distributed between Union and States per Finance Commission recommendations.
- Article 280: Finance Commission constituted every five years to recommend revenue distribution and grants-in-aid.
- Article 243-I: State Finance Commission constituted every five years for State-panchayat revenue distribution.
- Article 131: Supreme Court's original jurisdiction over Union-State and inter-State disputes.
- National Emergency (Article 352) suspends the normal federal distribution of power; India's only such Emergency ran June 1975-January 1977.
Sources
Further Reference
For deeper reading on this topic and the wider polity syllabus, these standard works are recommended:
- M. Laxmikanth, Indian Polity (McGraw Hill) — the standard UPSC handbook.
- D.D. Basu, Introduction to the Constitution of India (LexisNexis) — authoritative constitutional-law treatment.
- The Constitution of India — Bare Act — the official text.
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Constitutional provisions
Supreme Court's original and exclusive jurisdiction over Union-State and inter-State disputes.
Governor constitutes a State Finance Commission every five years to recommend State-panchayat revenue distribution.
Divides legislative power into Union List (98), State List (59), and Concurrent List (52) subjects.
Residuary legislative power, over subjects not in any list, vests in the Union.
Union law generally prevails over conflicting State law on Concurrent List subjects, subject to a reserved-assent exception.
Union-List duties levied by the Union but collected by the Union (Union territories) or the States (other cases).
Union List taxes distributed between Union and States as Parliament prescribes, based on Finance Commission recommendations.
President constitutes a Finance Commission every five years to recommend revenue distribution and grants-in-aid.