Centre-State financial relations & GST federalism

The constitutional scheme of fiscal federalism

The Indian Constitution distributes financial powers between the Union and States through Part XII, Articles 264 to 293, building a deliberately asymmetric federation where revenue-raising powers are concentrated at the Centre while heavy expenditure responsibilities fall on the States. This vertical fiscal imbalance is the structural fact every UPSC answer on the subject must acknowledge.

Distribution of taxing powers flows from the Seventh Schedule. Before the 101st Amendment, the Union List (List I) carried the buoyant taxes — income tax (Entry 82), customs (Entry 83), corporation tax, excise on manufacture (Entry 84) — while the State List (List II) held land revenue, stamp duty, agricultural income tax, and sales tax/VAT (Entry 54). Residuary taxing power rests with Parliament under Article 248 read with Entry 97 of List I.

The pre-GST sharing mechanics ran through Articles 268-272:

• Article 268: duties levied by the Union but collected and appropriated by the States (e.g., stamp duties).
• Article 269: taxes levied and collected by the Union but assigned to States (inter-State sale taxes).
• Article 269A (inserted 2016): levy and collection of GST on inter-State trade (IGST), apportioned between Union and States.
• Article 270: the divisible pool — taxes levied and collected by the Union but distributed between Union and States on the Finance Commission's recommendation.
• Article 271: surcharges for Union purposes, which are not shared — a recurring PYQ trap, since cesses and surcharges stay outside the divisible pool.

The Finance Commission under Article 280 is the constitutional balancing wheel. Constituted every five years by the President, it recommends (a) the distribution of net tax proceeds between Union and States (vertical devolution) and their inter-se allocation (horizontal devolution), (b) the principles governing grants-in-aid under Article 275, and (c) measures to augment State Consolidated Funds to supplement panchayats and municipalities. The 15th Finance Commission (N.K. Singh, report for 2021-26) fixed States' share of the divisible pool at 41% (reduced from the 14th FC's 42% to account for the reorganisation of Jammu & Kashmir into Union Territories in 2019).

Grants and borrowing. Article 275 provides statutory grants charged on the Consolidated Fund of India; Article 282 allows discretionary grants for any public purpose — the constitutional hook for centrally sponsored schemes, criticised for bypassing the Finance Commission. State borrowing is constrained by Article 293: a State indebted to the Centre needs Union consent to borrow further, a leverage point sharpened during the FRBM-era debates and the 2020 pandemic borrowing relaxations.

Retain the numbered Articles cold: examiners test the 268-vs-269-vs-270 distinction and the surcharge exclusion almost every cycle.

GST and the 101st Amendment: pooled sovereignty

The Constitution (One Hundred and First Amendment) Act, 2016 introduced the Goods and Services Tax with effect from 1 July 2017, the most significant restructuring of Indian fiscal federalism since 1950. It subsumed central excise, service tax, additional customs duties, State VAT, entry tax, luxury tax, and entertainment tax into a single destination-based consumption tax.

The constitutional machinery:

• Article 246A confers concurrent power on both Parliament and State legislatures to make GST laws, overriding the rigid List-based division — a genuine sharing of sovereign taxing power.
• Article 269A governs IGST on inter-State supplies, levied and collected by the Union and apportioned.
• Article 279A creates the GST Council, chaired by the Union Finance Minister with State Finance Ministers as members. Decisions require a three-fourths majority of weighted votes, with the Centre holding one-third and States collectively two-thirds. No decision passes without substantial State concurrence, nor over Centre's objection — a model of cooperative, even 'pooled', federalism.

Mohit Minerals (2022) is the landmark you must cite. In Union of India v. Mohit Minerals Pvt. Ltd. (May 2022), the Supreme Court held that GST Council recommendations are persuasive, not binding on the Union or States; both legislatures exercise simultaneous power under Article 246A, and recommendations are the product of collaborative dialogue, not command. The judgment reframed GST federalism as 'uncooperative federalism' where States retain bargaining leverage — a quotable line for Mains GS-2.

GST compensation. The GST (Compensation to States) Act, 2017 guaranteed States compensation for revenue loss for five years (to June 2022), assuming a 14% annual growth baseline, funded by a compensation cess. The shortfall during 2020-21, aggravated by COVID-19, triggered a sharp Centre-State standoff resolved through a back-to-back loan arrangement of ₹1.1 lakh crore and later ₹1.59 lakh crore.

Why this matters for the exam

This topic is doubly weighted: Prelims tests precise constitutional facts (which Article, what voting share, what the divisible pool excludes), while Mains GS-2 — under the syllabus head 'functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure' — demands analytical essays on whether GST has strengthened or eroded fiscal federalism.

PYQ anchors: UPSC 2021 Mains asked, 'Although the federal principle is dominant in our Constitution... the judiciary has played a key role in defining... federal structure'; the 2021 Prelims tested Finance Commission functions. Expect statement-based Prelims questions distinguishing Articles 268, 269, 269A, 270, 271.

High-yield retention list: 101st Amendment (2016), GST live 1 July 2017; Articles 246A, 269A, 279A; GST Council 3/4 majority with Centre 1/3 weight; 15th FC 41% devolution; Mohit Minerals (2022) — recommendations non-binding; compensation guaranteed five years to 2022; surcharges/cesses (Art 271) outside the divisible pool.