Centre State Relations in Terms of Finance

India is a country that follows federal structure in which powers are shared among the centre and state. Inspite of being federal as per the constitution, the centre exercises more power than the state. This is the reason why India is termed as quasi- federal in its true nature. The state is dependent on Union Government in many aspects that cause a limitation on their powers and self-ruling capacities. In the matters of finance, the situation is same. The article of Constitution provides complete distribution of resources among the different bodies and this article deals with same concept.


Centre, State, Finance, Federal, Constitution


Because of the terrible financial situations of the country during independence, the drafters of the constitution invested a lot of time and efforts in creating finance related provisions. This is the reason why the Constitution of India has detailed legislations that deal with financial matters of our country. It includes the topics related to distribution of revenue, taxes, grants, etc. These are dealt from Article 268[1] to Article 293[2] (Part XII) and the subject matters are divided among the Union and the States. In simple words, we can say that the Centre can deal with financial matters stated under Union List, State Governments can deal the subject of State List and both can exercise powers upon the topics included in Concurrent list. The Finance Commission of India looks upon and possesses control on such matters. In this article, we are going to do a detailed study on this concept.

Distribution of Power in Matters of Taxation and Grants

There is an elaborated distribution of powers provided under the Article 268 to Article 281. It presents guidelines to the Centre for the distribution of financial resources among the states. Besides this, it also lays down standards for the Union and State to work together in the issues of collection and levying of taxes through proper arrangements.

  • Article 268[3] deals with taxes charged by the Union but accumulated and appropriated by the States. For instance, Stamp duties on bills of Exchange and Excise duties on medical and toilet preparations containing alcohol. These taxes are not part of the Consolidated Fund of India and are given to that state only. Through the 88th Amendment[4] in the Constitution, a 268A was introduced which involved service tax within this article. But this was again excluded by the 101th Amendment[5] after the introduction of GST. This amendment also excluded excise duties on medical and toilet preparation, which was earlier included in this article but now it’s merged under GST.
  • Article 269[6] includes taxes collected and levied by the Union but allocated to the states. These consist of taxes on the sale and purchase of goods in the inter-state trade or commerce affairs or the taxes on the shipment of goods in the course of inter-state trade or commerce.

Subclause 5 of Article 269 (A) directs the Parliament on making laws for inter-state trade and commerce. In the case, Goodyear India Ltd. v. State of Haryana[7], the question that was raised before the court was to decide the legitimacy of two sales tax acts dealing with the consignment of goods. The court specified that Section 13AA of Bombay Sales Tax Act[8] and Section 9(1)(b)[9] of Haryana General Sales Act, prescribing rules on the tax on delivery of goods was beyond the scope of authority of respective State Legislatures because the power to tax inter-state trade rests only with the Parliament. Hence the mentioned sections were held invalid.

  • Article 270 involves taxes imposed by centre and distributed between the Centre and the State. For example- Service Tax.

In the case of T.M. Kanniyan v. Income Tax Officer, Pondicherry[10] the Supreme Court said that Income tax, as per the Article 270 forms a part of the consolidated fund of India. Also, the court spoke that it is not necessary to distribute income tax to Union territories that are administered by the President. 

  • Article 273[11] talk about grant-in-aid from the centre to the states.  There are two types of grants, statutory grants and consolidated grants. The statutory grants are generally for the welfare of the scheduled tribes in a state or to uplift the level of administration of scheduled areas (Article 275)[12]. These grants are given from the Consolidated Fund by the Parliament in case, if any state needs assistance. On the other hand, when the Center provides grants to states on the advice of Planning Commission which is at the discretion of Union, it is discretionary grant. It helps the state to achieve their goals (Article 282)[13].

Effects of Emergency on Centre- State Financial Relations

In the situations of National Emergency, the president has the authority to declare that all the provision related to division of taxes and subjects relating grants- in- aids between the centre and the state remain adjourned. However, this suspension is temporary in nature and cannot remain applicable after the expiration of that particular Financial Year. However, when the country is going through financial emergency imposed under Article 280, the centre state financial relations transform. The union becomes immensely powerful and controllable and compels the states to follow all the guidelines provided by them. In such cases, the Union can provide directions like:

  • Reducing the salary and allowances provided to the employees working under state government. It even included the salary of high court judges.
  • The President exercises the authority to make changes in distribution and allocation of taxes from the Centre to State. He can also direct the states to monitor financial propriety laid down by the Parliament.
  • The states can also be forced to reserve the consideration of the President on all financial and money bills even after they are passed by the legislature of the State.

The Finance Commission of India

Article 280[14] deals with the Financial Commission of India. To allocate the sources of revenue between the Centre and State, this commission is constituted by the President in every 5 years. This idea was borrowed from Commonwealth Commission of Australia. This commission provides ideas and recommendation to the President on subjects of ensuring equal distribution of funds so that there is no harm to the autonomy of state and also the revenue resources of centre remain unlimited. The provisions of Article 280 include composition of the commission that basically consists of five members including a chairman (appointed by president). The criteria for selection of the chairman are:

  • He/she may be judge of a High Court or qualified enough to be appointed.
  • He/she must have great knowledge of accounts and finance of Government.
  • He/ she must be experienced in the mentioned matters and must be specialised in the subject of economics.

The finance commission functions include the distribution of net proceeds between the centre and state accompanied by allocating the same, to provide guidelines related to grants- in- aid of revenue of the State, to provide proposals on enlarging the consolidated fund of state in order to provide assistance to Panchayats and Municipal Bodies and other matters related to finance. The commission has the same powers as that of civil courts like the power to summon the witness, production of documents, etc. It plays an important role in strengthening the fiscal federal structure and settling the financial issues of country.


In the federal country like India, both the Union and State play important roles in legislative, administrative and financial matters. When we talk about the financial rights, union exercises more powers in comparison to state. No state can afford to work without the financial assistance from the Central government. The future of country in financial aspects looks bright because the financial commission is working liberally as per the demands of states. Various new policies being introduced by the government like introduction of Goods and Service Tax are worth appreciating because it has brought much more uniformity in the taxation. This will help in increasing the revenues in the long run. At last, we can conclude that all the loopholes that are existing in the financial structure of our country can be easily solved if both the state and the centre work cooperatively. If sincere efforts are put and harmonious working is done, keeping the political motives aside, India can be very successful in development in terms of finance and can generate increased revenues.


  1. What are the relations of Centre and State in financial matters?
  2. What are the measures in the Constitution regarding these relationships?
  3. What happens with these provisions at the time of national and financial emergency?
  4. What is the Finance Commission of India?
  5. What are its functions, composition and significance?


  1. MD. Sahabuddin Mondal, Central State Relation – Legislative, Administrative and Financial, (Apr. 14th 2015), [online]

Available at: http://www.legalservicesindia.com/article/2312/Central-State-Relation—Legislative,-Administrative-and-Financial.html

  • Civilsdaily, Financial Relations between Centre and State: Art. 268 to 293 (Sept. 20th 2017), [online]

Available at: https://www.civilsdaily.com/financial-relations-between-centre-and-state-art-268-to-293/

  • Shubhangi R., Financial Relations between Centre and State | India (Oct. 18th 2017), [online]

Available at: https://www.yourarticlelibrary.com/political-science/financial-relations-between-the-center-and-the-states/45907

[1] Article 268 of the Constitution of India, 1949. Available at: https://indiankanoon.org/doc/1694425/

[2] Article 293 of the Constitution of India, 1949. Available at: https://indiankanoon.org/doc/237570/

[3] Article 268 of the Constitution of India, 1949. Available at: https://indiankanoon.org/doc/1694425/

[4] Eighty- eighth Amendment of the Constitution of India, 1949.  Available at: https://www.india.gov.in/my-government/constitution-india/amendments/constitution-india-eighty-eighth-amendment-act-2003

[5] One hundred and first Amendment of the Constitution of India,1949. Available at: http://legislative.gov.in/sites/default/files/Cons.amend%20101-060717.pdf

[6] Article 269 of the Constitution of India, 1949. Available at: https://indiankanoon.org/doc/1135479/

[7] Goodyear India Ltd. v. State of Haryana, 1990 AIR 781, 1989 SCR Supl. (1) 510.

[8] Section 13AA of Bombay Sales Tax Act, 1959. Available at: https://www.mahagst.gov.in/en/levy-purchase-tax-certain-cases

[9] Section 9(1)(b) of Haryana General Sales Act,1983

[10] T.M. Kannaiyan v. Income Tax Officer, Pondicherry, 1968 AIR 637, 1968 SCR (2) 103.

[11] Article 270 of the Constitution of India, 1949. Available at: https://indiankanoon.org/doc/1465729/

[12] Article 275 of the Constitution of India, 1949. Available at: https://indiankanoon.org/doc/465538/

[13] Article 282 of the Constitution of India, 1949.  Available at: https://indiankanoon.org/doc/1146668/

[14] Article 280 of the Constitution of India, 1949. Available at: https://indiankanoon.org/doc/559924/

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