Polity
Centre-State Relations
Financial Relations (Articles 264–293)
Centre-State financial relations for CGPSC: tax powers, Arts 268–271, grants, Finance Commission (15th and 16th), GST Council, borrowing, Chhattisgarh's share.
Prerequisites
- Legislative Relations — tax powers are entries in the same three lists.
- Public Finance — budget terms (Consolidated Fund, deficits) used below.
- Chhattisgarh State Budget Basics — where central transfers show up in the state’s own budget.
The Hook: One Line in the Union Budget, a Big Line in Raipur
Connect
When the Union Budget is presented each February, officials in Chhattisgarh’s Finance Department look closely at one line: the state’s share in central taxes. Under the 15th Finance Commission (2021–26), Chhattisgarh’s share of the divisible pool was 3.407%.
Then there is the ground beneath Korba, Dantewada and Raigarh: coal, iron ore and bauxite. In July 2024 the Supreme Court held that royalty is not a tax and that states can tax mineral rights, a ruling closely watched in mineral-rich states such as Chhattisgarh.
Who may levy which tax, who keeps the money, and how is it shared? That is financial relations (वित्तीय संबंध), the most practical part of federalism.
Why it matters: Prelims tests Arts 268–293, the Finance Commission (chairs, shares, criteria) and the GST Council. Mains asks about vertical fiscal imbalance, cesses and surcharges, GST and the states’ fiscal autonomy.
1. Allocation of Taxing Powers
Financial relations are in Part XII (Articles 264–293). Taxing power is divided through the Seventh Schedule:
| List | Examples of taxes |
|---|---|
| Union List | Income tax (except on agricultural income), corporation tax, customs, taxes on the capital value of assets, excise on tobacco and on petroleum products kept outside GST |
| State List | Land revenue, agricultural income tax, taxes on land and buildings, taxes on mineral rights (subject to Parliament’s limits on mineral development), excise on alcoholic liquor for human consumption, taxes on vehicles, electricity consumption, tolls, professions (maximum ₹2,500 a year, Art 276), sales tax on petroleum products and liquor |
| Concurrent | Some stamp duties and fees |
| Art 246A | GST: both Parliament and states (since 2016); IGST on inter-state supply by Parliament only |
| Residuary | Parliament (Art 248, Entry 97), e.g. gift tax, wealth tax, expenditure tax in the past |
Basic rule: “No tax shall be levied or collected except by authority of law” (Art 265). An executive order cannot impose a tax.
2. Distribution of Tax Revenue (Articles 268–271)
| Article | Levied by | Collected by | Proceeds go to | Taxes |
|---|---|---|---|---|
| 268 | Union | States | States | Stamp duties on bills of exchange, cheques, promissory notes, insurance policies, transfer of shares, etc. |
| 269 | Union | Union | Assigned to states | Taxes on inter-state sale or purchase of goods (CST) and on inter-state consignment of goods |
| 269A | Union | Union | Shared between Union and states as Parliament provides on the GST Council’s recommendation | IGST: GST on inter-state supplies |
| 270 | Union | Union | Shared (the divisible pool) on the Finance Commission’s recommendation | All Union List taxes except those in 268, 269, 269A, surcharges and cesses; also CGST |
| 271 | Union | Union | Union only | Surcharges on taxes in Arts 269 and 270 (not on GST) |
The 80th Amendment (2000): the 'divisible pool'
Before 2000, only income tax and Union excise were shared, under separate rules. The 80th Amendment (2000) adopted the “alternative scheme of devolution” recommended by the 10th Finance Commission: all central taxes (except those in 268, 269, surcharges and cesses) form one divisible pool to be shared with states. Cesses and surcharges stay outside it, which states criticise.
3. Grants-in-Aid (सहायता अनुदान)
| Type | Article | Features |
|---|---|---|
| Statutory grants | 275 | Charged on the Consolidated Fund of India each year for states in need, as Parliament determines (on Finance Commission advice). Specific grants for the welfare of Scheduled Tribes and for raising the level of administration of Scheduled Areas (proviso to 275(1)) |
| Discretionary grants | 282 | The Union or a state may make grants for any public purpose, even outside its legislative field. Historically used for Planning Commission grants and now for Centrally Sponsored Schemes |
| Other | 273 (now historical) | Grants in lieu of export duty on jute to Assam, Bihar, Odisha and West Bengal; a time-bound provision |
Chhattisgarh angle
The proviso to Article 275(1) lets the Centre give special grants for the welfare of STs and for the administration of Scheduled Areas. This is a direct constitutional channel for tribal-majority districts of Bastar and Surguja. See Tribes of Chhattisgarh.
4. The Finance Commission (वित्त आयोग) — Article 280
| Point | Detail |
|---|---|
| Constituted by | President, at the end of every fifth year or earlier |
| Composition | Chairman + four members, appointed by the President |
| Qualifications | Set by Parliament: Finance Commission (Miscellaneous Provisions) Act, 1951. The chairman should have experience in public affairs; members drawn from High Court judges or those qualified to be, experts in government finance and accounts, financial administration, and economics |
| Report | To the President, who lays it before both Houses with an explanatory memorandum (Art 281) |
| Nature | Advisory: recommendations are not binding, though they are normally accepted |
Functions (Art 280(3)):
- Vertical devolution: share of the net proceeds of taxes between the Centre and states, and horizontal allocation among states.
- Principles for grants-in-aid to states from the Consolidated Fund of India.
- Measures to augment a state’s Consolidated Fund to supplement the resources of panchayats and municipalities, based on the State Finance Commission’s recommendations (added by the 73rd and 74th Amendments).
- Any other matter referred by the President.
Finance Commissions to remember
| Commission | Chairman | Period | States’ share of divisible pool |
|---|---|---|---|
| 1st | K.C. Neogy | 1952–57 | — |
| 13th | Vijay Kelkar | 2010–15 | 32% |
| 14th | Y.V. Reddy | 2015–20 | 42% |
| 15th | N.K. Singh | 2020–21 and 2021–26 | 41% (1 point less because Jammu and Kashmir became a Union Territory) |
| 16th | Arvind Panagariya | 2026–27 to 2030–31 | 41% (retained) |
16th Finance Commission: constituted on 31 December 2023; report submitted to the President on 17 November 2025 and tabled in Parliament on 1 February 2026.
Horizontal criteria: 15th vs 16th Finance Commission
| Criterion | 15th FC (2021–26) | 16th FC (2026–31) |
|---|---|---|
| Income distance (gap from richer states’ per capita income) | 45% | 42.5% |
| Population (Census 2011) | 15% | 17.5% |
| Demographic performance | 12.5% | 10% |
| Area | 15% | 10% |
| Forest (and ecology) | 10% | 10% |
| Tax and fiscal effort | 2.5% | — (dropped) |
| Contribution to GDP | — | 10% (new) |
Chhattisgarh's share
- 15th Finance Commission (2021–26): Chhattisgarh’s share was 3.407% of the divisible pool.
- 16th Finance Commission (2026–31): analyses of the report listed Chhattisgarh among the states whose share fell compared with the 15th FC. Check the exact figure in the report before quoting it in an answer.
The forest criterion helps a state like Chhattisgarh, which has a large forest cover; the income-distance criterion also favours lower-income states.
5. The GST Council (वस्तु एवं सेवा कर परिषद) — Article 279A
| Point | Detail |
|---|---|
| Basis | Art 279A, inserted by the 101st Amendment, 2016. GST began on 1 July 2017 |
| Chairperson | Union Finance Minister |
| Members | Union Minister of State (Revenue or Finance); the finance or taxation minister of each state (and of Delhi, Puducherry and Jammu and Kashmir) |
| Voting | Decisions need three-fourths of the weighted votes of members present and voting. Centre’s vote = one-third; all states together = two-thirds |
| Quorum | One-half of total members |
| Role | Recommends tax rates, exemptions, thresholds, model laws, and the date for bringing petroleum products under GST |
| Mohit Minerals (2022) | The Supreme Court held that GST Council recommendations have persuasive value and are not binding; Parliament and state legislatures have simultaneous power |
Compensation: The GST (Compensation to States) Act, 2017 promised states compensation for five years (assuming 14% annual revenue growth). That compensation period ended on 30 June 2022.
Why the voting rule matters
With one-third of the votes, the Centre alone cannot pass a decision (it needs three-fourths). With two-thirds, states alone cannot pass one either. Every decision therefore needs the Centre and most states, which is why the Council is called a model of cooperative federalism, and why states also say they have lost independent taxing power.
6. Borrowing, Immunities and Emergencies
| Article | Provision |
|---|---|
| 292 | Union borrows on the security of the Consolidated Fund of India, within limits fixed by Parliament (inside or outside India) |
| 293 | A state may borrow only within India, within limits set by its legislature. If it owes money to the Centre, it needs the Centre’s consent for new borrowing |
| 285 | Union property is exempt from state taxes, unless Parliament provides otherwise |
| 289 | State property and income are exempt from Union taxes, but Parliament can tax a state’s trading or business activities |
| 360 | Financial Emergency: the Centre can direct states on financial propriety, order salary cuts, and require Money Bills to be reserved for the President. It has never been proclaimed (as of 2026) |
Borrowing limits in court
Kerala’s suit under Article 131 challenging central limits on its borrowing was referred to a Constitution Bench in April 2024. It shows that Article 293(3) consent has become a live federal dispute.
7. The Mineral Royalty Judgment (2024): a Chhattisgarh Story
Mineral Area Development Authority v. Steel Authority of India (25 July 2024)
| Point | Detail |
|---|---|
| Bench | Nine judges; majority 8:1 (Justice B.V. Nagarathna dissented) |
| Held | Royalty paid under Section 9 of the MMDR Act, 1957 is not a tax; it is a contractual payment for the right to extract minerals |
| States’ power | States can tax mineral rights (Entry 50) and mineral-bearing land (Entry 49) of the State List. Parliament’s power over mineral development (Entry 54, Union List) does not take this away unless a law expressly limits it |
| Follow-up order (14 August 2024) | States may recover past dues only for the period from 1 April 2005, paid in instalments over 12 years from 1 April 2026, with no interest or penalty for the period before 25 July 2024 |
Why it matters for Chhattisgarh: the state is a leading producer of coal, iron ore and bauxite, so the ruling widened the fiscal space of mineral-rich states. See Mineral Resources and Mining Belts.
Analysis for Mains: Fiscal Federalism Under Strain
| Issue | Explanation |
|---|---|
| Vertical fiscal imbalance | The Centre has the buoyant taxes; states carry most spending responsibilities (health, police, agriculture, local bodies) |
| Cesses and surcharges | They lie outside the divisible pool (Art 270), so a higher share of them reduces the effective share of states below the headline 41% |
| Centrally Sponsored Schemes (Art 282) | Tied funds with matching shares limit states’ choice of priorities |
| GST | States gave up most independent indirect taxes; compensation ended in 2022; producing states argue destination-based GST shifts revenue to consuming states |
| Borrowing limits (Art 293) | Off-budget borrowings counted against state limits; disputes in court |
| Finance Commission criteria | Efficiency versus equity: better-off states want reward for performance; poorer states want need-based transfers |
Balanced conclusion: India’s fiscal federalism combines a constitutional, rules-based transfer system (Finance Commission) with negotiated cooperation (GST Council). Strengthening it means bringing cesses and surcharges into the divisible pool or capping them, giving states more untied funds, and settling borrowing disputes through the Inter-State Council rather than courts.
Memory Tricks
268 to 271: 'Stamp, Sale, Share, Surcharge'
- 268 — Stamp duties: Union levies, states collect and keep
- 269 — inter-state Sale: Union levies and collects, assigned to states
- 270 — Share: the divisible pool, split by Finance Commission
- 271 — Surcharge: Union keeps it all
“Stamp, Sale, Share, Surcharge” — the states’ share shrinks as the number grows.
Finance Commission chairs: 'Kelkar, Reddy, Singh, Panagariya'
13–14–15–16 = K-R-S-P: “Korba Raipur Surguja Pendra”. Shares: 32 → 42 → 41 → 41.
Don’t Confuse
| This | vs | That |
|---|---|---|
| Art 275 — statutory grants, Consolidated Fund, states in need, ST and Scheduled Area grants | vs | Art 282 — discretionary grants, any public purpose (CSS) |
| Art 270 — shared taxes (divisible pool) | vs | Art 271 — surcharges, Union only |
| Finance Commission — Art 280, every 5 years, advisory | vs | GST Council — Art 279A, permanent, recommendatory (Mohit Minerals) |
| Art 292 — Union borrows inside or outside India | vs | Art 293 — state borrows only within India |
| Art 285 — Union property exempt from state taxes | vs | Art 289 — state property exempt from Union taxes (but not trading income) |
| State Finance Commission — Art 243-I, for panchayats | vs | Finance Commission — Art 280, Union-state transfers |
Common Mistakes
MCQ traps
- “Surcharges are shared with states.” False. Under Art 271 they go wholly to the Union, and cesses are also outside the divisible pool.
- “Agricultural income tax is levied by the Centre.” False. It is a State List tax.
- “The 16th Finance Commission raised the states’ share to 42%.” False. It retained 41%. The 42% figure belongs to the 14th FC.
- “GST Council recommendations bind Parliament and the states.” False. Mohit Minerals (2022) held they are persuasive, not binding.
- “A state can borrow abroad with the Centre’s consent.” False. Under Art 293, a state borrows only within India.
- “Royalty on minerals is a tax, so only Parliament can regulate it.” False after the 2024 nine-judge ruling: royalty is not a tax, and states can tax mineral rights.
Practice
All questions below are original practice questions written in CGPSC style. They are not previous-year questions.
Level 1: Foundation
- The Finance Commission is constituted under Article ______ of the Constitution.
- The chairman of the Sixteenth Finance Commission is ______.
- The maximum tax on professions that a state may levy per year is ______.
Answers
- Article 280.
- Arvind Panagariya.
- ₹2,500 (Art 276).
Level 2: Prelims MCQs
Q1. Consider the following statements about the GST Council:
- It is chaired by the Union Finance Minister.
- The vote of the Central Government carries a weight of one-third of the total votes cast.
- In Mohit Minerals (2022), the Supreme Court held that its recommendations are binding on Parliament and the State legislatures.
Which of the statements given above is/are correct?
- (a) 1 only
- (b) 1 and 2 only
- (c) 2 and 3 only
- (d) 1, 2 and 3
Answer and explanation
(b) 1 and 2 only. Under Art 279A the Union Finance Minister chairs the Council, and the Centre has one-third of the weighted vote (states together two-thirds). Statement 3 reverses the ruling: the Court called the recommendations persuasive, not binding.
Q2. Match List I (Article) with List II (Nature of tax revenue):
| List I | List II |
|---|---|
| A. Article 268 | 1. Surcharges, retained wholly by the Union |
| B. Article 269 | 2. Levied by the Union, collected and appropriated by the states |
| C. Article 270 | 3. Levied and collected by the Union but assigned to the states |
| D. Article 271 | 4. Levied and collected by the Union and distributed between the Union and the states |
- (a) A-2, B-3, C-4, D-1
- (b) A-3, B-2, C-4, D-1
- (c) A-2, B-4, C-3, D-1
- (d) A-1, B-3, C-4, D-2
Answer and explanation
(a) A-2, B-3, C-4, D-1. Stamp duties (268) are collected and kept by the states; inter-state sale taxes (269) are assigned to them; the divisible pool (270) is shared on Finance Commission advice; surcharges (271) stay with the Union.
Q3. Which of the following criteria for horizontal distribution was introduced for the first time by the Sixteenth Finance Commission?
- (a) Income distance
- (b) Forest cover
- (c) Contribution to GDP
- (d) Population as per Census 2011
Answer and explanation
(c) Contribution to GDP, with a 10% weight. Income distance, forest and Census 2011 population were all used by the 15th FC as well. The 16th FC also dropped the 2.5% tax-effort criterion.
Q4. Statutory grants-in-aid for promoting the welfare of Scheduled Tribes and raising the level of administration of Scheduled Areas are provided under:
- (a) Article 282
- (b) Article 280
- (c) Article 293
- (d) Article 275
Answer and explanation
(d) Article 275 (proviso to clause 1). These grants are charged on the Consolidated Fund of India. Article 282 covers discretionary grants, Article 280 the Finance Commission, Article 293 state borrowing.
Q5. In Mineral Area Development Authority v. Steel Authority of India (2024), the Supreme Court held that:
- (a) Royalty is a tax, and only Parliament can levy taxes on minerals
- (b) Royalty is not a tax, and states have the power to tax mineral rights
- (c) States can tax minerals only with the prior consent of the President
- (d) Royalty and taxes on mineral rights both belong exclusively to the Union List
Answer and explanation
(b). The nine-judge bench (8:1) held that royalty under the MMDR Act, 1957 is not a tax, and that states can tax mineral rights under the State List. The ruling matters to mineral-rich states such as Chhattisgarh, Odisha and Jharkhand.
Level 3: Mains Answer Writing
Q1. (60 words) State the functions of the Finance Commission under Article 280.
Model answer outline
- Intro: A quasi-judicial constitutional body set up every five years by the President (chairman + four members).
- Functions: distribution of net tax proceeds between Centre and states and among states; principles of grants-in-aid; measures to augment state funds for panchayats and municipalities; any matter referred by the President.
- Current: 16th FC (Panagariya), 41% for 2026–31.
Q2. (150–200 words) “Vertical fiscal imbalance is the central challenge of Indian fiscal federalism.” Discuss with reference to the Finance Commission and the GST Council.
Model answer outline
- Intro: The Centre controls the buoyant taxes; states carry most spending duties, creating vertical imbalance (Part XII, Arts 264–293).
- Correctives: Finance Commission (Art 280) shares the divisible pool, 41% under the 15th and 16th FCs; Art 275 grants; GST Council (Art 279A) as a cooperative forum with weighted voting.
- Problems: cesses and surcharges outside the pool; tied Centrally Sponsored Schemes; loss of state tax autonomy under GST and the end of compensation in 2022; borrowing limits under Art 293.
- Chhattisgarh angle: share of 3.407% under the 15th FC; benefits from forest and income-distance criteria; mineral wealth and the 2024 royalty judgment widen its own revenue options; Art 275 grants for Scheduled Areas.
- Way forward: cap cesses and surcharges or include them in the pool; more untied transfers; a permanent forum for fiscal disputes through the Inter-State Council.
- Conclusion: Cooperative fiscal federalism needs predictable, untied and fair transfers.
Quick Revision Table
| Fact | Detail |
|---|---|
| Financial relations | Part XII, Arts 264–293 |
| Art 265 | No tax without authority of law |
| Art 268 | Stamp duties: Union levies, states collect and keep |
| Art 269 / 269A | Inter-state sale tax assigned to states / IGST shared on GST Council advice |
| Art 270 | Divisible pool (80th Amendment, 2000) |
| Art 271 | Surcharges: Union only |
| Art 275 / 282 | Statutory grants (ST welfare, Scheduled Areas) / discretionary grants |
| Art 276 | Profession tax maximum ₹2,500 a year |
| Art 279A | GST Council: FM chairs; Centre 1/3, states 2/3; decisions by 3/4 |
| Art 280 / 281 | Finance Commission: chairman + 4; report laid before Parliament |
| 14th / 15th / 16th FC | Y.V. Reddy 42% / N.K. Singh 41% / Arvind Panagariya 41% (2026–31) |
| 16th FC new criterion | Contribution to GDP (10%); income distance 42.5% |
| Chhattisgarh’s share (15th FC) | 3.407% |
| Art 292 / 293 | Union borrowing / state borrowing only within India |
| GST | From 1 July 2017; compensation ended 30 June 2022 |
| Mohit Minerals (2022) | GST Council recommendations not binding |
| MADA v. SAIL (25 July 2024) | Royalty not a tax; states can tax mineral rights (8:1) |
| Art 360 | Financial Emergency: never proclaimed (as of 2026) |
Key Takeaways
Key Takeaways
- Taxing power follows the lists; GST is a special simultaneous power (Art 246A).
- Arts 268–271: the further you go, the smaller the states’ share (from “states keep” to “Union keeps”).
- The Finance Commission (Art 280) decides the vertical share: 41% under both the 15th and 16th FCs.
- The GST Council needs both the Centre and most states to agree; its recommendations are not binding (2022).
- For Chhattisgarh: 3.407% share under the 15th FC, Art 275 grants for Scheduled Areas, and the 2024 royalty ruling.
What’s Next
- Commissions on Centre-State Relations — Sarkaria and Punchhi on fiscal transfers
- Constitutional Bodies — the Finance Commission alongside other constitutional bodies
- Public Finance — budgets, deficits and FRBM targets
- State Election and Finance Commission (Chhattisgarh) — the state-level counterpart for local bodies
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