Topic 04 of 5 · Chapter 11 · Indian Polity
Centre-State Financial Relations
Distribution of taxes, Finance Commission (Article 280), grants-in-aid, borrowing powers, GST Council, and fiscal federalism.
📋 In This Article
1. Distribution of Taxes
The Constitution divides taxing powers between the Centre and States:
| Category | Examples | Who Gets Revenue |
|---|---|---|
| Taxes levied and collected by Centre; kept by Centre | Customs duty, Corporation tax, Surcharge on income tax | Centre only |
| Taxes levied and collected by Centre; shared with States | Income tax (except on agricultural income), Central GST | Centre + States (as per Finance Commission) |
| Taxes levied by Centre; collected and kept by States | Stamp duties on bills of exchange, cheques | States only |
| Taxes levied and collected by States; kept by States | Land revenue, State GST, Excise on liquor | States only |
2. Finance Commission (Article 280)
The Finance Commission is a constitutional body established under Article 280. Key features:
- Constituted by the President every 5 years
- Consists of a Chairman and 4 other members
- Recommends distribution of taxes between Centre and States
- Recommends grants-in-aid to States
- Recommendations are advisory — not binding on the President
⭐ Exam Fact: The 16th Finance Commission has been constituted (2023) under the chairmanship of Dr. Arvind Panagariya. Finance Commissions are numbered — 1st FC (1951), 2nd FC (1956), etc.
3. Grants-in-Aid
The Centre provides grants-in-aid to States under various provisions:
- Article 275: Grants to States in need of assistance (statutory grants)
- Article 282: Discretionary grants — Centre can make grants for any public purpose
- Finance Commission recommends the amount of grants under Article 275
4. Borrowing Powers
- Centre can borrow on the security of the Consolidated Fund of India (Article 292)
- States can borrow on the security of the Consolidated Fund of the State (Article 293)
- States cannot borrow from foreign sources without Centre’s consent
- If a State has outstanding loans from the Centre, it cannot borrow without Centre’s consent
5. GST Council (101st Amendment)
The Goods and Services Tax (GST) was introduced by the 101st Constitutional Amendment (2016). Key features:
- GST replaced multiple indirect taxes (Central Excise, Service Tax, VAT, etc.)
- Article 246A: Both Parliament and State Legislatures can make laws on GST
- Article 269A: IGST (Inter-State GST) levied and collected by Centre; shared with States
- Article 279A: GST Council — a constitutional body
GST Council (Article 279A)
- Chaired by the Union Finance Minister
- Members: State Finance Ministers
- Recommends GST rates, exemptions, and other matters
- Decisions by 3/4 majority — Centre has 1/3 vote; States together have 2/3 vote
✅ Remember: GST is a major fiscal federalism reform. It replaced the fragmented indirect tax system with a unified tax. The GST Council is a unique body where Centre and States jointly decide tax policy.
6. Key Points for Exam
🔑 Must-Remember Facts
- Finance Commission: Article 280; constituted every 5 years
- Finance Commission: Chairman + 4 members
- Finance Commission recommendations: Advisory (not binding)
- Grants-in-Aid: Article 275 (statutory) and Article 282 (discretionary)
- GST: 101st Amendment (2016)
- GST Council: Article 279A; chaired by Union Finance Minister
- GST Council decisions: 3/4 majority
- Centre’s vote in GST Council: 1/3; States together: 2/3
- States cannot borrow from foreign sources without Centre’s consent
- 16th Finance Commission: Dr. Arvind Panagariya (2023)