Centre–State Financial Relations deal with the constitutional distribution of:
Taxation Powers + Tax Revenues + Grants + Borrowing Powers
between:
Union Government
and:
State Governments
The principal constitutional provisions are:
Articles 268–293
The framework aims to balance:
Revenue Capacity + Expenditure Responsibilities + Fiscal Equity + State Autonomy
Important institutions include:
The core principle is:
Fiscal Federalism = Division of Revenue Powers + Inter-Governmental Transfers + Financial Coordination
The important Articles are:
268 → Duties Levied by Union, Collected and Appropriated by States
269 → Taxes Levied and Collected by Union, Assigned to States
269A → GST on Inter-State Supplies
270 → Taxes Levied and Distributed Between Union and States
271 → Surcharge for Union Purposes
273 → Grants in lieu of Export Duty on Jute and Jute Products
275 → Grants from Union to Certain States
276 → Taxes on Professions, Trades, Callings and Employments
277 → Savings
279 → Calculation of Net Proceeds
280 → Finance Commission
281 → Finance Commission Recommendations
282 → Expenditure from Union or State Revenues for Any Public Purpose
283 → Custody of Consolidated Funds and Public Accounts
284 → Custody of Court Deposits and Other Moneys
285 → Union Property Exempt from State Taxation
286 → Restrictions on State Taxation of Sale or Purchase of Goods
287 → Exemption from Taxes on Electricity
288 → Exemption from Taxation of Water or Electricity in Certain Cases
289 → State Property and Income Exempt from Union Taxation
290 → Adjustment in Respect of Certain Expenses and Pensions
290A → Annual Payment to Certain Devaswom Funds
291 → Omitted
292 → Borrowing by Government of India
293 → Borrowing by States
Memory:
268–293 → Financial Relations
2. Fiscal Federalism
3. Meaning
Fiscal federalism refers to:
Distribution of Financial Responsibilities and Resources
between different levels of government.
In India:
Union + States
have different:
Taxation powers
Expenditure responsibilities
Revenue capacities
This creates the need for:
Fiscal Transfers
4. Why Financial Relations Matter
States are responsible for major areas such as:
Health
Education
Agriculture
Police
Local government
Infrastructure
Yet the Union controls many major and broad-based taxation sources.
This can create:
Vertical Fiscal Imbalance
Vertical and Horizontal Imbalance
5. Vertical Fiscal Imbalance
Vertical imbalance refers to the mismatch between:
Revenue-Raising Capacity
and:
Expenditure Responsibilities
between:
Union and States
6. Horizontal Fiscal Imbalance
Horizontal imbalance refers to differences among:
Different States
in:
Revenue capacity
Development level
Population
Fiscal needs
Geographic conditions
Therefore:
Vertical Imbalance
→ Union vs States
Horizontal Imbalance
→ State vs State
Distribution of Taxation Powers
7. Constitutional Principle
The Constitution distributes:
Taxing Powers
between:
Parliament
State Legislatures
The Seventh Schedule contains taxation entries.
The basic objective is:
Clear Constitutional Authority to Tax
8. Union Taxation Powers
The Union has authority over major taxation fields such as:
Income tax other than agricultural income
Corporation tax
Customs duties
Certain excise duties
Inter-State GST framework
9. State Taxation Powers
States have taxation authority over areas such as:
Agricultural income
Certain taxes on land
State excise on alcoholic liquor for human consumption
Taxes on vehicles
Taxes on professions, trades, callings and employments
State GST within the constitutional framework
Article 268
10. Union-Levied, State-Collected Duties
Article 268 deals with certain:
Duties Levied by the Union
but:
Collected and Appropriated by States
This creates a constitutional mechanism for:
Union Levy + State Revenue
Article 269
11. Union Taxes Assigned to States
Article 269 concerns certain taxes that are:
Levied and Collected by the Union
but:
Assigned to the States
The constitutional framework determines:
How the revenue is distributed
Article 269A
12. Inter-State GST
Article 269A deals with:
Goods and Services Tax on Supplies in the Course of Inter-State Trade or Commerce
The Union levies and collects:
Integrated GST
and the proceeds are:
Apportioned between Union and States
according to constitutional provisions.
Article 270
13. Distribution of Tax Revenues
Article 270 deals with:
Taxes Levied and Collected by the Union and Distributed Between Union and States
This is central to:
Tax Devolution
14. Divisible Pool
The Union shares certain tax revenues with States according to the constitutional framework and Finance Commission recommendations.
The share distributed to States is commonly referred to as:
States' Share in the Divisible Pool
Article 271
15. Surcharge
Article 271 allows Parliament to impose:
Surcharges on Certain Taxes
for:
Union Purposes
The proceeds of such surcharges:
Do Not Form Part of the Divisible Pool
This is an important UPSC Prelims point.
Memory:
Surcharge → Union
Article 279
16. Net Proceeds
Article 279 provides for the calculation of:
Net Proceeds
of certain taxes.
The:
Comptroller and Auditor General
certifies the net proceeds.
The CAG's certificate is:
Final
for constitutional purposes.
Memory:
279 → Net Proceeds → CAG
Grants-in-Aid
17. Article 275
Article 275 provides for:
Grants-in-Aid of the revenues of States
from:
Consolidated Fund of India
These grants are intended to support:
States in Need of Assistance
and may include special grants for specified purposes.
18. Grants and Tribal Areas
Article 275 also contains provisions concerning:
Scheduled Tribes
and:
Administration of Scheduled Areas
This provides a constitutional basis for certain special grants.
Article 282
19. Discretionary Public-Purpose Grants
Article 282 allows:
Union or State
to make grants for:
Any Public Purpose
even if that purpose is not within its legislative competence.
This provides flexibility in:
Developmental Expenditure
20. Article 275 vs Article 282
Article 275
Constitutionally Provided Grants-in-Aid
Article 282
Discretionary Expenditure for Public Purpose
Memory:
275 → Grants
282 → Public Purpose
Finance Commission
21. Article 280
The Finance Commission is one of the most important institutions of:
Fiscal Federalism
It is constituted by the:
President
22. Composition
The Finance Commission consists of:
Chairman + Four Other Members
Their qualifications and manner of selection are determined by:
Parliamentary Law
23. Main Functions
The Finance Commission recommends principles concerning:
Tax Distribution
Distribution between:
Union + States
of the:
Net Proceeds of Taxes
Allocation Among States
The allocation among States of their respective shares.
Grants-in-Aid
Principles governing:
Grants-in-Aid
Other Matters
Any other matter referred to it by the:
President
in the interests of sound finance.
Article 281
24. Finance Commission Recommendations
The President causes the recommendations of the:
Finance Commission
to be laid before:
Each House of Parliament
along with:
An Explanatory Memorandum
on the action taken.
Tax Devolution
25. Meaning
Tax devolution refers to:
Sharing of Union Tax Revenue with States
It is one of the principal mechanisms for correcting:
Vertical Fiscal Imbalance
26. Finance Commission and Tax Devolution
The Finance Commission recommends:
The Principles of Tax Devolution
between:
Union + States
and:
Among States
Horizontal Devolution
27. Meaning
Horizontal devolution means distribution of:
States' Share
among:
Different States
The Finance Commission considers appropriate criteria such as:
Population
Income distance
Area
Forest and ecology
Demographic performance
Fiscal effort
The exact formula varies across Finance Commissions.
Grants vs Tax Devolution
28. Difference
Tax Devolution
States receive:
A Share of Union Tax Revenues
Grants
States receive:
Transfers from the Union
according to constitutional or statutory frameworks.
Therefore:
Devolution → Shared Tax Revenue
Grant → Financial Transfer
GST and Fiscal Federalism
29. GST Constitutional Framework
GST significantly changed Centre–State financial relations.
Important provisions include:
Article 246A
Article 269A
Article 279A
GST created:
Shared Taxing Powers
between:
Union + States
30. GST Council
Article 279A establishes the:
GST Council
It provides a forum for:
Union–State consultation
GST rate discussions
Exemptions
Principles of GST
Place-of-supply related matters
Other GST-related recommendations
It is an important institution of:
Cooperative Fiscal Federalism
31. GST Council Structure
The GST Council includes:
Union Finance Minister
Union Minister of State in charge of Revenue or Finance
State Finance/Taxation Ministers or nominated Ministers
The Union Finance Minister is:
Chairperson
State Borrowing
32. Article 293
Article 293 deals with:
Borrowing by States
A State may borrow:
Within the territory of India
subject to constitutional conditions.
33. Union Consent
Where a State has outstanding:
Loans from the Government of India
certain restrictions apply to further borrowing.
The State may require:
Consent of the Government of India
for additional borrowing.
34. Why Borrowing Rules Matter
Borrowing provisions help maintain:
Macroeconomic and Fiscal Stability
while recognising:
State Fiscal Autonomy
Tax Immunities
35. Article 285
Article 285 provides:
Exemption of Union Property from State Taxation
unless Parliament provides otherwise.
Memory:
285 → Union Property
36. Article 289
Article 289 provides:
Exemption of State Property and Income from Union Taxation
subject to constitutional exceptions.
Memory:
289 → State Property + Income
37. Union vs State Tax Immunity
285
→ Union Property
→ State Tax Exemption
289
→ State Property + Income
→ Union Tax Exemption
Article 286
38. Restrictions on State Taxation
Article 286 restricts State taxation of:
Sale or Purchase of Goods
in constitutionally specified circumstances.
The provision is important for:
Inter-State and International Trade
and was significantly reshaped by the GST constitutional framework.
Article 287
39. Electricity
Article 287 provides certain:
Exemptions from State Taxation of Electricity
supplied to the Union in specified circumstances.
Article 288
40. Water and Electricity
Article 288 provides certain exemptions from State taxation concerning:
Water or Electricity
in specified cases involving authorities established by Parliament or existing law for specified purposes.
Article 290
41. Adjustment of Certain Expenses and Pensions
Article 290 deals with:
Adjustment in Respect of Certain Expenses and Pensions
It addresses specified financial relationships between:
Union
States
Article 290A
42. Devaswom Funds
Article 290A provides for:
Annual Payment
from the:
Consolidated Fund of certain States
to specific:
Devaswom Funds
It applies to:
Kerala
Tamil Nadu
as constitutionally specified.
Omitted Article 291
43. Article 291
Article 291 has been:
Omitted
by the:
26th Constitutional Amendment Act, 1971
It was related to:
Privy Purses
Memory:
291 → Omitted
Article 292
44. Union Borrowing
Article 292 deals with:
Borrowing by the Government of India
The Union may borrow upon:
Security of the Consolidated Fund of India
within limits fixed by:
Parliament
Article 293
45. State Borrowing
Article 293 deals with:
Borrowing by States
The provision allows State borrowing within India subject to constitutional restrictions.
Fiscal Transfers
46. Why Transfers Are Needed
Transfers help address:
Vertical Fiscal Imbalance
and:
Horizontal Fiscal Imbalance
They can support States with:
Lower revenue capacity
Higher expenditure needs
Special geographical challenges
Development deficits
Centrally Sponsored Schemes
47. Role
Centrally Sponsored Schemes involve:
Union + State Financing
and:
Shared Implementation
They can help achieve national policy objectives in areas largely implemented by States.
48. Fiscal Federalism Concern
Centrally designed schemes can create debates concerning:
State Fiscal Autonomy
because States may have limited flexibility in using tied funds.
Therefore:
National Priorities vs State Policy Space
Centralisation and Fiscal Federalism
49. Centralising Features
India's financial framework gives the Union significant fiscal capacity because:
Major broad-based taxes are centrally controlled
States depend on transfers
Borrowing is constitutionally regulated
GST created shared taxation arrangements
50. State Fiscal Autonomy
States require:
Predictable + Adequate + Flexible Resources
to effectively perform their constitutional responsibilities.
Therefore:
Fiscal Federalism → Resource Autonomy + Fiscal Discipline
Fiscal Responsibility
51. Why Fiscal Discipline Matters
Both Union and States must balance:
Development spending
Welfare
Debt
Fiscal deficits
Infrastructure needs
Borrowing without fiscal discipline can affect:
Macroeconomic Stability
Centre–State Financial Challenges
52. Vertical Imbalance
States have large expenditure responsibilities but relatively narrower tax bases.
53. Horizontal Imbalance
States vary significantly in:
Revenue capacity
Population
Development
Geography
Infrastructure
54. Conditional Transfers
Tied or conditional transfers may reduce:
State Policy Flexibility
55. GST Compensation and Revenue Concerns
The transition to GST created concerns around:
Revenue predictability
State finances
Compensation arrangements
Fiscal uncertainty
The broader lesson is:
Tax Reform Must Preserve Fiscal Sustainability
56. Borrowing Constraints
States may face:
Borrowing Restrictions
designed to preserve macroeconomic stability.
This creates tension between:
Fiscal Autonomy + Fiscal Discipline
Fiscal Federalism and Cooperative Federalism
57. Cooperative Fiscal Federalism
Institutions such as:
Finance Commission
GST Council
Inter-State Council
NITI Aayog
promote:
Union–State Fiscal Dialogue
Judicial Role
58. Courts and Financial Relations
Courts may examine:
Constitutional taxation powers
Legislative competence
Tax immunity
GST constitutional issues
Borrowing-related constitutional questions
Judicial review protects:
Constitutional Fiscal Federalism
Important Supreme Court Cases
59. State of West Bengal v. Union of India
Important for understanding:
Union–State Constitutional and Financial Relations
and the broader nature of Indian federalism.
60. Jindal Stainless Ltd. v. State of Haryana
Important for:
Taxation + Article 301 + Economic Federalism
It clarified principles concerning:
State Taxation and Freedom of Trade
61. Mohit Minerals Pvt. Ltd. v. Union of India
Important for:
GST Council + Cooperative Federalism
The Supreme Court held that recommendations of the GST Council are:
Persuasive Rather Than Automatically Binding
This is an important modern federalism principle.
UPSC Prelims Facts
62. Important Facts
Articles 268–293 deal primarily with Centre–State financial relations.
Article 269A deals with GST on inter-State supplies.
Article 270 deals with distribution of certain Union taxes between Union and States.
Article 271 provides for Union surcharges.
Surcharge proceeds are not part of the divisible pool.
Article 275 provides for grants-in-aid from the Consolidated Fund of India.
Article 280 provides for the Finance Commission.
Finance Commission is constituted by the President.
Finance Commission consists of a Chairman and four other members.
Article 281 deals with laying Finance Commission recommendations before Parliament.
Article 282 allows Union or States to make grants for any public purpose.
Article 283 concerns custody of Consolidated Funds and Public Accounts.
Article 285 exempts Union property from State taxation, subject to Parliamentary provision.
Article 289 provides exemption of State property and income from Union taxation, subject to constitutional exceptions.
Article 292 deals with Union borrowing.
Article 293 deals with State borrowing.
Article 279 deals with calculation of net proceeds.
CAG certifies net proceeds for constitutional purposes.
Article 290A concerns annual payment to specified Devaswom Funds.
Article 291 has been omitted.
GST Council is established under Article 279A.
GST Council is an important institution of cooperative fiscal federalism.
Article 246A provides special GST legislative powers.
Article 269A concerns inter-State GST.
Article 293 can require Union consent for certain State borrowing where constitutional conditions are met.
UPSC Prelims Traps
63. Trap 1
"Finance Commission distributes every rupee transferred from Union to States."
False
It recommends principles relating to:
Tax devolution
Grants-in-aid
Other specified matters
64. Trap 2
"Article 275 and Article 282 are identical."
False
275 → Constitutional Grants-in-Aid
282 → Grants for Any Public Purpose
65. Trap 3
"Union surcharge is shared with States through the divisible pool."
False
Surcharges under Article 271 are:
For Union Purposes
and are not included in the divisible pool.
66. Trap 4
"Article 280 establishes the GST Council."
False
280 → Finance Commission
279A → GST Council
67. Trap 5
"Article 293 gives States unlimited borrowing power."
False
State borrowing is subject to:
Constitutional Conditions
68. Trap 6
"Article 285 exempts State property from Union taxation."
False
285 → Union Property from State Taxation
289 → State Property and Income from Union Taxation
69. Trap 7
"Article 268 means States levy the duty."
False
The duty is:
Levied by Union
but:
Collected and Appropriated by States
70. Trap 8
"GST is purely a Union tax."
False
GST operates through:
Shared Union–State Constitutional Powers
under the special GST framework.
71. Trap 9
"Finance Commission recommendations automatically become law."
False
They are recommendations submitted under:
Article 281
with an accompanying explanatory memorandum on action taken.
72. Trap 10
"Article 291 is still an operative financial provision."
False
It has been:
Omitted
Easy Memory Tricks
73. Financial Articles
268 → Union Levy, State Collection
269 → Union Collection, State Assignment
269A → Inter-State GST
270 → Tax Devolution
271 → Surcharge
275 → Grants
279 → Net Proceeds
280 → Finance Commission
281 → Recommendations
282 → Public Purpose
285 → Union Property
289 → State Property + Income
290A → Devaswom Funds
292 → Union Borrowing
293 → State Borrowing
74. Tax Distribution Memory
268
→ Union Levy
→ State Collection
269
→ Union Collection
→ State Assignment
270
→ Union Tax
→ Shared with States
271
→ Surcharge
→ Union
75. Federal Institutions
280 → Finance Commission
279A → GST Council
263 → Inter-State Council
Memory:
280 → Finance
279A → GST
263 → Coordination
Quick Revision
76. One-Page Revision
CENTRE–STATE FINANCIAL RELATIONS
↓
Articles 268–293
↓
Taxation Powers
↓
Tax Distribution
↓
Grants-in-Aid
↓
Finance Commission
↓
GST Council
↓
Borrowing
↓
Tax Immunities
↓
Fiscal Transfers
↓
Vertical + Horizontal Imbalance
↓
Fiscal Federalism
Mains Perspective
77. Constitutional Significance
Centre–State financial relations are central to:
Indian Fiscal Federalism
because States have substantial:
Expenditure Responsibilities
while the Union possesses many:
Broad-Based Revenue Sources
The constitutional system therefore creates:
Tax Devolution + Grants + Fiscal Coordination
78. Advantages
Revenue Sharing
Allows States to access shared Union revenues.
Fiscal Equalisation
Transfers can reduce disparities among States.
National Standards
Union funding can support national development objectives.
Macroeconomic Stability
Borrowing rules help maintain fiscal discipline.
Cooperative Fiscal Federalism
Finance Commission and GST Council provide institutional coordination.
79. Challenges
Vertical Fiscal Imbalance
State expenditure responsibilities exceed their own revenue capacity in several important areas.
Horizontal Imbalance
States differ widely in fiscal capacity and expenditure needs.
Transfer Dependence
Heavy reliance on Union transfers can constrain State autonomy.
Conditional Transfers
Tied funding may limit State policy flexibility.
GST Coordination
Shared taxation requires continuous Union–State consensus.
Borrowing Constraints
Fiscal discipline may sometimes conflict with developmental financing needs.
80. Reform Perspective
Strengthen Fiscal Predictability
States require:
Predictable + Timely Transfers
Strengthen Finance Commission
Its recommendations should support:
Fiscal equalisation
Revenue adequacy
Responsible fiscal behaviour
Strengthen GST Council
GST decisions should continue to rely on:
Cooperative Decision-Making
and transparent fiscal analysis.
Expand State Fiscal Capacity
States can improve:
Own-tax revenue
Tax administration
Non-tax revenue
Public asset management
Rationalise Centrally Sponsored Schemes
Greater flexibility can help States adapt national programmes to:
Regional Priorities
Fiscal Discipline
Both Union and States should maintain:
Debt Sustainability + Development Spending
81. Fiscal Federalism Formula
Revenue Capacity
+
Expenditure Responsibilities
+
Tax Devolution
+
Grants
+
Borrowing
↓
Fiscal Federalism
↓
Fiscal Equity
+
State Autonomy
+
Macroeconomic Stability
82. Conclusion
Centre–State financial relations determine:
Who Raises Revenue
Who Receives Revenue
Who Spends Resources
and:
How Fiscal Imbalances Are Corrected
The central constitutional framework is:
268–271 → Tax Distribution
275 → Grants
280 → Finance Commission
282 → Public Purpose Expenditure
293 → State Borrowing
The most important UPSC formulas are:
270 → Tax Devolution
271 → Surcharge for Union
275 → Grants-in-Aid
280 → Finance Commission
279A → GST Council
285 → Union Property
289 → State Property + Income
292 → Union Borrowing
293 → State Borrowing
The broader principle is:
Adequate Resources + Fiscal Equity + State Autonomy + Fiscal Discipline = Effective Fiscal Federalism