INTRODUCTION

Money is the life-blood of all governments without which they could not function and
undertake obligations to improve the lots of the people. Since in a federal polity two sets of
governments operate, it is necessary that each of them has sufficient funds.

The Indian Constitution has made elaborate provisions relating to the distribution of the taxes
as well as non-tax revenue and the power of borrowing, supplemented by provisions for
grants-in-aid by the union to the states.

Article 246: It provides 3 kinds of lists that are as follows:

 Union List- the Union Government has the authority to make laws relating to the
subject matter given under the list I, called the Union list.
 State List- the State Government is vested with the power to frame laws on the
subjects mentioned under list II, called the state list.
 Concurrent List- it empowers both the Centre as well as State government to make
laws with regards to the subjects provided by the list III. Further, in the case of
conflict, the central government decision will prevail over the State government
decision.

TAXATION ONLY BY AUTHORITY OF LAW

Article 265 empowers the Centre or state government to levy and collect tax, but it is not an
absolute power; as Article 265 imposes certain general and specific limitations on it.

The expression “authority of law” basically refers to the statute law i.e. the act of the
legislature. It essentially means that there must be an existence of expressive legislative
provision for the imposition of a tax. Therefore, the important thing to note here is that a tax
cannot be levied merely by executive order, as it will not fall within the meaning of this
expression.

The use of the expression “levy or collect” mentioned herein is not only limited that the
imposition of a tax must be authorised by the law but rather it is comprehensive and wide
enough to include that even the collection of the tax must be sanctioned by the law.
Therefore, it basically means that every stage in this entire process must comply with the
requirement.
# Pratibha R.C.C. Spun, pipe and cement products v. State of Karnataka (1990)

In the instant case, a tax was charged in the pretext of a fee. Since there was no legislative
enactment behind the same, the imposition of the tax was considered illegal u/A. 265.

CONSOLIDATED FUNDS

As per Article 266(1), Consolidated fund is a fund consisting of:

 All revenues received by the Government of India.

 All loans raised by the Government through issuing of treasury bills, advances,
recovery of loans etc.

The Consolidated Fund mentioned under Article 266(1) which is generally called as the
budget.

All the expenditures of the Government are met through the Consolidated Fund except in
cases of unforeseen circumstances. Further, no money out of the consolidated funds can be
appropriated by the respective government without the authorization from the legislature.
[Article 266(3)]

Similar to the Consolidated Fund of India there are consolidated funds in each state as well. It
includes all the revenue received by the Government of a State, all loans, advances or money
received by the Government in repayment of loans etc.

CONTINGENCY FUND

Article 267 empowers the Parliament to establish by the authority of law, a Contingency fund
for the purpose of meeting urgent or unforeseen circumstances, titled as the ”Contingency
Fund of India”. The fund is in a form of imprest and the Parliament may make law regarding
the sum which has to be deposited from time to time in the fund.

The fund is under the disposal of the President of India and it does not require any prior
sanction or approval from the Parliament. Though afterwards, the expenditure needs to be
authorised by the Parliament under Article 115 or Article 116. Further, with the approval of
the parliament, the Government has to replenish the contingency fund by drawing out an
equal proportion of sum from the consolidated fund.
DISTRIBUTION OF POWERS - LEVYING & COLLECTION OF
TAXES

Article (268 to 281) of the Constitution has made elaborate provisions that provide directions
to the Centre relating to the distribution of financial resources amongst the states. The
provisions can be summarized as follows:

1. Taxes levied by the Union but collected and kept by the States (Article 268)
2. Taxes levied and collected by the Union but assigned to the States (Article 269)
3. Taxes levied and distributed between the Union and the States (Article 270)
4. Grant-in-aid from the Centre to the States (Article 273, Article 275 and Article 282)
5. Sharing of proceeds from other taxes.

Taxes levied by the Union but collected and kept by the States (Article 268)

Article 268 refers to stamp duties levied by the Union but collected and appropriated by the
States. It includes stamp duties on bills of exchange, cheques and promissory notes as levied
by the Government of India. These taxes are not included in the Consolidated Fund of India
and appropriated by the same state in which it was levied thus do not contribute to the
Consolidated Fund of India, while in the case of Union territories the fund shall be
appropriated to the Government of India.

The Indian States have been repeatedly raised their concerns regarding the same that Centre
is not optimally allowing the state to exploit the taxation resources mentioned under Article
268 & 269. Experts have been suggesting that the scope to raise more resources under Article
268 and 269 must be freshly examined.

Taxes levied and collected by the Union but assigned to the States (Article 269)

Article 269(1) includes all the taxes on the “sale or purchase of goods” & “taxes on the
consignment of goods” except those included in Article 269A & newspapers. These taxes are
assigned to States as provided by the law but are collected and levied by the Government of
India.

The expression “taxes on the sale or purchase of goods” does not imply on all kinds of trade
but essentially refers to the taxes that are levied on inter-state sale or purchase of all kinds of
goods except newspapers.
The expression “taxes on the consignment of goods” refers to tax duty levied on the
consignment of goods when happening in the course of Inter-state trade.

Article 269(2) lays down that the revenue obtained from such tax is distributed between states
(except in case of Union territories where it goes to the central government). It does not form
the part of the consolidated fund of India. The manner of the distribution is to be prescribed
by the Parliament.

Article 269(3) further explains that the parliament has the power to define the scope of what
constitutes the sale, purchase or consignment of goods in the course of inter-State trade or
commerce.

Taxes levied and distributed between the Union and the States (Article 270)

Article 270(1) - It lays down the procedure of the appropriation for certain taxes i.e. all the
taxes except those mentioned under Article 268, 269 and 269A and any surcharge on taxes
and duties mentioned in Article 271 or any cess levied for a specific purpose.

These taxes are levied and collected by the Union. The tax shall be distributed between the
States and the Central Government.

It may include taxes such as:

a) Excise Duty on non-GST products (Liquor, Petroleum Products)

b) Income Tax

c) Basic Customs Duty etc.

The manner for this distribution is provided under Article 270(2).

The 101st Amendment inserted two sub-clauses to Article 270 (1A & 1B). It basically lays
down how the scope of the tax to be distributed between Centre and State has been modified
after the introduction of GST.

Article 270 (1A) - Tax collected by the CG under Article 246A (1) will also be distributed
between the Centre & the state as per the method provided under Article 270(2)

It implies that the taxes collected under Article 246A (1) shall also be distributed between the
states and the Union.
Article 270 (1B) provides that the following taxes collected by the Central government will
also be distributed between Centre and States:

 The amount apportioned to the Central government in IGST i.e. the central portion in
IGST.
 Taxes collected under IGST which has been used for payment of CGST.

Article 270(2) - This clause lays down that the central tax obtained by the government as
mentioned in clause (1) shall be distributed between the states as per the time and manner
provided under clause (3) and such share will not form the part of the consolidated fund of
India

Article 270(3) - All central taxes formed in one central pool shall be distributed in the manner
prescribed by the President of India as per the recommendations of the Finance Commission.

# T.M. Kanniyan v. Income Tax Officer, Pondicherry (1967)

The court stipulated that the purpose behind Article 270 is to ensure equitable distribution of
the financial resources between the Centre and the State.

Article 271 provides that the Parliament has the power to increase any duty or tax anytime by
levying a surcharge except in the case of GST mentioned under Article 246A and all the
proceeds obtained from the surcharges will be part of the Consolidated fund of India.

Grant-in-aid from the Centre to the States [Article (275 and 282)]

Under Article 275 and Article 282, the Parliament may make grants-in-aid from the
Consolidated Fund of India to such States as are in need of assistance, particularly for the
promotion of the welfare of tribal areas, including a special grant to Assam.

Two types of Grants:

 Statutory grants - Article 275

 Discretionary grants - Article 282

Article 275 - Statutory Grants

These grants are given by the Parliament to the specific states who are in need of assistance.
a) Under this, different amounts of grants are fixed for different states.

b) The amount is given out of the consolidated fund of India.

c) There are two provisos to clause (1) dealing with the granting of aid to the states for any
developmental scheme approved by the GOI for the welfare of scheduled areas and scheduled
tribes, with a special focus to Assam.

These grants are given by the Parliament to the specific states who are in need of assistance.
a) Under this, different amounts of grants are fixed for different states. b) The amount is
given out of the consolidated fund of India. c) There are two provisos to clause (1) dealing
with the granting of aid to the states for any developmental scheme approved by the GOI for
the welfare of scheduled areas and scheduled tribes, with a special focus to Assam.

Article 282- Discretionary Grants

The Centre upon its own discretion can grant aid to certain States for the public purpose.
These grants are not compulsory in nature. The Centre used to make these grants on the
recommendations of the planning commission. Further, during the planning commission era,
the sum under discretionary grants was even bigger than the statutory grants.

FINANCE COMMISSION

Article 280 - The President shall within 2 years from the commencement of this Constitution
and thereafter at the expiration of every five years has the power to set up a Finance
Commission. The Finance Commission will assist the President by making recommendations
to him regarding the distribution of net proceeds of taxes to be divided between the centre
and the states.

COMPOSITION

The composition of Finance Commission is mentioned under the Finance Commission Act,
1951 which when read with provisions of Article 280 lays down that the Commission
basically consists of five members out of which there will be one Chairman, as appointed by
the President of India. The criteria for selection of the Chairman are that he/she should have a
special understanding of public affairs while the members shall possess the following
qualifications:

1. He/she may be either a judge of a High Court or qualified enough to be appointed so.

2. He/she must have deep knowledge of the finance and accounts of the Government.

3. He/she must be experienced in the field of financial matters and in administration; or

4. He/she must have a special understanding of economics.

FUNCTIONS OF THE FINANCE COMMISSION [Article 280(3)]

The Finance Commission has the following functions which involve recommending the
President regarding:

1. The distribution of the net proceeds between the Union and the States and allocation of
such proceeds between different States.

2. To lay down guidelines concerning the grants-in-aid of the revenue of the states out of the
Consolidated Fund of India.

3. The suggestions on augmentation of the Consolidated Fund of a State to supplement the

resources of the Panchayats and Municipalities in the State.

4. Any other matter in the interest of sound finance.

POWERS OF THE FINANCE COMMISSION [Article 280(4)]

The Finance Commission has all the powers of a civil court conferring it with a power to
summon the witnesses, requiring any person to furnish any information, production of
documents or any point that the Commission regards relevant or useful.

SIGNIFICANCE OF THE FINANCE COMMISSION

1. Finance Commission has played an imperative role in strengthening and improvising the
fiscal federal structure of India. With the setting up of a new Finance Commission after every
five years, and each time the recommendations have been made wider.

2. Further, the Union Government has also adopted a liberal attitude and been receptive
towards the recommendations of the Finance Commission and accepted them at large.

3. The Commission along with giving recommendations on the subjects already mentioned
has also suggested and gave its views regarding various other financial issues such as returns
of the public undertakings, debt burdens of the States.

4. It has also settled many complicated financial issues from time to time-related to financial
issues between the Union and States. Thus, all in all, the Finance Commission has been
successful in bringing dynamic and progressive changes in the financial relations between the
Centre and the States as per the changing time.
Article 281 – Recommendations of the Finance Commission

It defines the process of how the recommendations of the Finance committee will be
introduced in parliament. As per this article, the President of India shall cause to lay down all
the recommendations made by the Finance Commission under the provisions of this
Constitution along with an explanatory memorandum before each House of the Parliament.

Report of the 15th Finance Commission for 2021-26

The 15th Finance Commission's recommendations for the 2021-26 period encompass various
key areas:

1. **Share of States in Central Taxes**: The share of states in central taxes for this period
remains at 41%, with a 1% adjustment to accommodate the newly formed union territories of
Jammu and Kashmir, and Ladakh.

2. **Criteria for Devolution**: The criteria for distributing central taxes among states remain
largely unchanged from the previous period, but with adjustments in reference periods for
certain indicators like income distance and tax efforts.

3. **Grants**:

- Revenue Deficit Grants: 17 states will receive grants worth Rs 2.9 lakh crore to eliminate
revenue deficit.

- Sector-Specific Grants: Rs 1.3 lakh crore will be given for eight sectors, including health,
education, agriculture, and infrastructure.

- State-Specific Grants: Rs 49,599 crore will be allocated for various state-specific needs,
with a high-level committee to monitor their utilization.

- Grants to Local Bodies: A total of Rs 4.36 lakh crore will be allocated to local bodies,
including health grants, based on population and area, with certain conditions for availing the
grants.

4. **Disaster Risk Management**: The existing cost-sharing patterns between the center and
states for disaster management funds will be retained, with a corpus of Rs 1.6 lakh crore for
state disaster management funds.
5. **Fiscal Roadmap**:

- The commission recommends fiscal deficit limits for both the center and states, aiming for
a reduction in total liabilities over the period.

- Extra annual borrowing is allowed for states undertaking power sector reforms.

6. **Revenue Mobilization**: Recommendations include strengthening income and asset-

based taxation, expanding the coverage of tax deduction and collection provisions, and
streamlining stamp duty and registration fees.

7. **Goods and Services Tax (GST)**: Resolving the inverted duty structure and
rationalizing the rate structure of GST are suggested, along with measures to expand the GST
base and ensure compliance.

8. **Financial Management Practices**: Recommendations include establishing an

independent Fiscal Council, adopting standard-based accounting, avoiding off-budget
financing, and improving fiscal forecasting.

9. **Other Recommendations**:

- Increasing spending on health by states.

- Establishing a Modernization Fund for Defence and Internal Security.

- Reforms in centrally-sponsored schemes, including third-party evaluation and stable

funding patterns.