Constitutional Law
Financial Relations between Union and States
Understand taxation authority, revenue sharing, grants, the Finance Commission, GST Council and borrowing in Indian fiscal federalism.
The short answer
Fiscal federalism determines who may tax, who collects, how revenue is shared and how Union and State governments coordinate public finance.
From authority to distribution
A tax question has three separate stages: valid legal authority, collection and constitutional distribution.
Authority of law
Article 265 requires legal authority for both levy and collection. The relevant legislative entry identifies competence, while the charging law must create the liability.
Different revenue arrangements
The Constitution distinguishes duties or taxes levied by the Union but collected or assigned in the prescribed way, taxes shared through the divisible pool and revenues retained by the levying government.
Vertical and horizontal distribution
Vertical distribution concerns the share between Union and States. Horizontal distribution concerns how the States' collective share is divided among individual States.
Grants and public purpose
Articles 275 and 282 support grants through different routes. They help address unequal fiscal capacity and permit spending for public purposes within the constitutional financial structure.
Finance Commission, GST Council and borrowing
Fiscal federalism works through institutions as well as constitutional allocations.
Finance Commission
The President constitutes a Finance Commission under Article 280. It recommends tax devolution, grants-in-aid principles and other referred financial measures.
GST structure
Article 246A gives Union and States concurrent GST power, while Parliament has exclusive power over inter-State supplies. Article 269A governs inter-State GST and Article 279A creates the GST Council.
Nature of GST Council recommendations
The Council is central to coordinated GST policy, but its recommendations do not themselves become binding legislation. Union and State laws remain products of their constitutional law-making powers.
Borrowing
Articles 292 and 293 separately govern Union and State borrowing. A State may require Union consent when constitutionally specified outstanding Union obligations exist.
Taxing power and distribution of revenue
Fiscal federalism separates authority to levy, machinery to collect and the constitutional destination of net proceeds.
Legislative authority
A tax requires legislative competence and Article 265 authority of law. Taxing entries are specific fields, while Article 246A separately governs GST.
Articles 268 and 269
The Constitution identifies duties levied by the Union but collected or appropriated by States and taxes levied and collected by the Union but assigned to States, subject to the governing law.
Article 270 divisible pool
Specified Union taxes and duties are distributed between Union and States under constitutional arrangements informed by Finance Commission recommendations. Surcharges and purpose-specific cesses require separate treatment.
Article 271 surcharge
Parliament may increase specified taxes and duties by surcharge for Union purposes, and those proceeds form part of the Consolidated Fund of India under the constitutional rule.
Finance Commission, devolution and grants
Articles 275, 280, 281 and 282 create related but distinct mechanisms for correcting vertical and horizontal fiscal imbalance.
Article 280 body
The President constitutes a Finance Commission every fifth year or earlier. It recommends Union-State tax distribution, inter-State allocation and principles for grants-in-aid.
Local government finance
The Commission recommends measures to augment State Consolidated Funds for Panchayats and Municipalities based on State Finance Commission recommendations.
Articles 275 and 282
Article 275 addresses constitutional grants-in-aid, while Article 282 permits Union or State grants for any public purpose despite legislative-field limits. Their source and conditions should not be conflated.
Transparency under Article 281
Finance Commission recommendations and an explanatory memorandum on action taken must be laid before each House of Parliament.
GST Council and cooperative fiscal federalism
The GST framework pools decision-making without extinguishing the constitutional legislative power of Parliament and the States.
Article 279A establishes the GST Council with Union and State representation and a weighted voting structure. It recommends rates, exemptions, model laws, threshold limits, place-of-supply principles and special provisions within the constitutional scheme.
Union of India v. Mohit Minerals holds that GST Council recommendations have persuasive value and support cooperative federalism rather than operating as independent binding commands. Parliament and State Legislatures retain the legislative power conferred by Article 246A.
A GST answer should distinguish the Council's recommendation, legislation enacted by the competent legislature and delegated rules or notifications. Each instrument has its own source, legal force and route of challenge.
Borrowing, public funds and fiscal responsibility
Revenue sharing is only one part of financial relations; borrowing and control of public money also shape State autonomy.
Articles 292 and 293
The Union and States may borrow within constitutional limits. A State that remains indebted to the Union may require Union consent for further borrowing, and conditions may accompany that consent.
Consolidated and contingency funds
Articles 266 and 267 distinguish Consolidated Funds, public accounts and Contingency Funds. Withdrawal and appropriation must follow constitutional and legislative control.
Fiscal conditions
Conditions attached to grants or consent must be traced to a valid power and assessed against federalism, equality and the purpose of the financial arrangement.
Problem method
Identify who levies, who collects, where proceeds go, whether devolution applies and which constitutional body or law controls the dispute.
Worked problem: levy, devolution or grant?
Suppose a State challenges a new Union charge and the conditions attached to funds released for a public programme.
Characterise the charge
Determine whether it is a tax, fee, surcharge or cess from its legal basis, purpose and relationship to services. The label in the Finance Act is relevant but does not replace constitutional analysis.
Trace the proceeds
Apply Articles 268 to 271 and the governing legislation to decide who collects the amount and whether it enters the divisible pool, is assigned to States or remains with the Union.
Classify the transfer
A Finance Commission-based devolution, Article 275 grant and Article 282 public-purpose grant rest on different constitutional foundations. Conditions must be tested within the correct route.
Review the condition
Ask whether the condition advances the programme, respects the source of authority and avoids using financial leverage to assume an unrelated State field without constitutional support.
Leading cases and what they establish
Read each authority for the proposition it proves, the legal question it answers and the reasoning that supports the result.
Union of India v. Mohit Minerals Pvt. Ltd.
(2022) 10 SCC 700
Facts: An importer challenged an integrated GST levy on ocean freight in a cost, insurance and freight transaction, raising the design of the GST framework and the GST Council's authority.
Legal question: Are GST Council recommendations binding commands that control the legislative power of Parliament and State Legislatures?
Held: GST Council recommendations have persuasive value in cooperative federalism but are not binding commands that displace Union and State legislative authority.
Reasoning: The Council supports cooperative decision-making, but its recommendations have persuasive value rather than independent binding force. Union and States retain the legislative authority assigned by the Constitution.
Why it matters: Use it for Articles 246A and 279A, fiscal federalism and the legal character of GST Council recommendations.
Read the judgmentState of West Bengal v. Kesoram Industries Ltd.
(2004) 10 SCC 201
Facts: Several State levies connected with land, minerals and industrial activity were challenged as taxes outside the States' legislative fields.
Legal question: How should legislative entries and the true nature of a fiscal levy be identified when constitutional fields appear to overlap?
Held: The true nature of a fiscal levy and the legislative entry supporting it must be identified from substance rather than its label.
Reasoning: Entries receive a broad and harmonious construction. The court examines the substance, measure and legal character of the levy instead of deciding competence from its label alone.
Why it matters: Use it when a problem asks whether a levy is a tax, fee or charge within a particular legislative field.
Read the judgmentUsing this topic in a legal answer
A clear answer sequence
- Start with Article 265 and identify the legislative source of the levy.
- Explain the collection and distribution category involved.
- Distinguish vertical from horizontal devolution.
- Discuss Finance Commission, grants and borrowing where relevant.
- For GST, apply Articles 246A, 269A and 279A together.
Points that are often confused
- Treating a budget announcement or circular as authority to tax.
- Confusing the Finance Commission with the GST Council.
- Saying GST Council recommendations automatically have the force of legislation.
Open the revision and self-check sheet
Rules to retain
- No tax may be levied or collected without authority of law.
- Tax competence and revenue distribution are different questions.
- Article 280 creates the Finance Commission.
- Article 279A creates the GST Council.
- Articles 292 and 293 govern borrowing.
Questions to test understanding
- What is vertical tax devolution?
- Are GST Council recommendations legally binding by themselves?
- Why must a charging provision exist?
Questions students ask
Are the Finance Commission and GST Council the same body?
No. The Finance Commission periodically recommends devolution and grants under Article 280. The GST Council is a continuing federal forum for GST recommendations under Article 279A.
Can an executive notification create a new tax without legislation?
No. Article 265 requires authority of law. Delegated instruments may operate within a valid taxing statute, but they cannot invent a levy beyond the statute.
Does every Union tax enter the divisible pool?
No. Article 270 and related provisions must be applied. Surcharges under Article 271, specified cesses and constitutionally excluded items require separate treatment.
Are Finance Commission recommendations legislation?
No. They are constitutional recommendations. Article 281 requires them and the explanatory memorandum on action taken to be laid before Parliament.
Are GST Council recommendations binding on legislatures?
Mohit Minerals treats them as persuasive products of cooperative federalism, not independent binding commands that displace legislative power under Article 246A.
Primary sources and further reading
- Constitution of India, Legislative Department
- Supreme Court judgment in Union of India v. Mohit Minerals
- Supreme Court discussion of fiscal legislative competence
- Finance Commission of India, constitutional provisions
This article is written for legal education. Verify the governing provision, applicable amendments and complete judgment before relying on a proposition in practice.