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.
Quick 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.
Landmark cases
Learn the facts, the rule and why the case matters. The citation alone will not strengthen an answer.
Union of India v. Mohit Minerals Pvt. Ltd.
(2022) 10 SCC 700Facts: 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.
Use in an answer: 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 201Facts: 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.
Use in an answer: Use it when a problem asks whether a levy is a tax, fee or charge within a particular legislative field.
Read the judgmentHow to write this answer in an exam
- 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.
Quick revision
- 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.
Test yourself
- What is vertical tax devolution?
- Are GST Council recommendations legally binding by themselves?
- Why must a charging provision exist?
Frequently asked questions
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.