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No system of federation can be successful unless both Union, and the States have at their disposal adequate financial resources to enable them to discharge their respective responsibilities under the Constitution. It is indeed a hard fact that if the legislative and administrative authority of the constituent units are to be maintained they must be autonomous financially. In India, the scheme of distribution of sources of revenue between the Centre and the States is based on the scheme laid down in the Government of India Act, 1935. The framers of the Indian Constitution desired that the scheme of financial relation be flexible and adaptable to varying needs and reviewable periodically in the light of experience, of Central resources, of State's needs, and available data. The Constitution of India thus introduces a unique element of flexibility while tackling the problems of distribution of public revenues.
Article 265 provides that no tax can be levied or collected except by authority of law. No tax can be imposed by an executive Order. The law providing for imposition of tax must be a valid law, that is, it should not be prohibited by any provisions of the Constitution [e. g.. Articles 276 (2), 285, etc.). Thus, a tax law will be void if it violates the fundamental rights to equality guaranteed by Article 14.
Article 268 provides the scheme of the distribution of revenue between the Union and the States The States possess exclusive jurisdiction over taxes enumerated in the State List. The Union is entitled to the proceeds of the taxes in the Union List. The Concurrent List includes no taxes. However, it is to be noted that while the proceeds of taxes within the State Lists are entirely retained by the States, proceeds of some of the taxes in the Union List may be allowed, wholly or partially to the States. The Constitution mentions following categories of the Union taxes which are wholly or partially assigned to the States:
According to Article 268 stamps duties mentioned in the Union List shall be levied by the Central Government. These duties are collected by the States within which such duties are leviable. The proceeds of such duties are assigned to the States.
Article 268A which was added by the Constitution (88th Amendment) Act, 2003 empowering the Union of India to levy service taxes which were to be collected and appropriated by the Union and the States in accordance with such principles as could be formulated by Parliament by law has been omitted by 101st Amendment of the Constitution in 2016.
The Constitution (80th Amendment) Act, 2000 has amended Art. 269 and substituted new clauses in place of clauses (1) and (2) of Art. 269. The amendment has been enacted on the basis of the recommendations of the Tenth Finance Commission. The Tenth Finance Commission has recommended that out of the total income obtained from certain Central taxes and duties 29% would be given to the States.
Clause (1) of Art. 269 provides that taxes on sale or purchase of goods and taxes on the assignment of goods except as provided in Article 269A shall be levied and collected by the Government of India but shall be assigned and shall be deemed to have been assigned to States on or after the 1st day of April, 1996 in the manner as may be prescribed by Parliament by law. The expression “taxes on the sale or purchases of goods” shall mean taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce.
The expression "taxes on the consignment of goods" shall mean taxes on the consignment of goods (where the consignment is to the person making it or to any other person) where such consignment takes place in the course of inter-State trade or commerce.
The Constitution (80th Amendment) Act, 2000 substituted a new Article for Art. 270. Article 270 (1) 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 in the manner provided in clause (2)”.
Article 271 provides that if Parliament at any time increases any of the duties or taxes mentioned in Arts. 269 and 270 except the goods and services tax under Article 246A by imposing a surcharge, the whole proceeds of any such surcharge shall form part of the Consolidated Fund of India.
(1) Under Article 273 grants-in-aid will be given to the States of Assam, Bihar, Odisha and West Bengal in lieu of export duty on the jute products. The sums of such grants are prescribed by the President with the consultation of the Finance Commission. These sums shall be given to the States for a period of ten years from the commencement of the Constitution. (2) Article 275 empowers Parliament to make such grants, as it may deem essential, to the States which are in need of financial assistance. The Constitution also provides for special grants given to the States which undertake schemes of development for the purpose of promoting the welfare of the Scheduled Tribes or raising the level of administration of the scheduled areas. A special grant to Assam is given for this purpose. (3) Under Article 282 both the Union and a State make grant for any public purpose even if it relates to a subject over which it cannot make laws. The Central Government can under this Article make grants to hospitals or to schools.
Articles 276 and 277 are saving provisions. These Articles save the authority of the State to levy taxes, on subjects now forming Part of the Union List, immediately before the commencement of the Constitution. Thus taxes which are being levied by a State or a Municipality or other local authority, notwithstanding that those taxes are mentioned in the Union List, continue to be levied by those authorities until Parliament by law makes contrary provision. Art. 276 empowers the States to impose taxes on professions, trades, callings and employment for the benefit of the State or of a municipality, district board, local boards or other local authorities.