Central and State Financial Relations — Revision Notes

⚡ 30-Second Revision

Articles 268-293: Constitutional framework for center-state finance
Article 280: Finance Commission every 5 years
15th FC: 41% tax devolution, demographic performance + forest criteria
GST: 101st Amendment, Article 279A GST Council, compensation mechanism
Vertical imbalance: Center collects 60%, spends 40%; States collect 40%, spend 60%
Cesses/surcharges not shared with states
CSS: Centrally Sponsored Schemes with shared funding
Cooperative federalism through GST Council weighted voting (Center 1/3, States 2/3)

2-Minute Revision

Center-state financial relations operate through constitutional framework (Articles 268-293) dividing financial powers between Union and states. Article 268 covers duties levied by Union but assigned to states, Article 269 deals with taxes collected by Union but assigned to states, Article 270 covers shared taxes, and Article 280 establishes Finance Commission.

The 15th Finance Commission (2020-25) recommended 41% tax devolution using criteria including population, income distance, area, forest cover, and demographic performance. GST implementation through 101st Amendment created unified tax system with GST Council (Article 279A) operating on cooperative federalism model with weighted voting.

Key challenges include vertical fiscal imbalance where center collects more revenue than expenditure share while states face opposite situation, growing use of non-shareable cesses and surcharges, and coordination difficulties in centrally sponsored schemes.

Recent developments include COVID-19 impact on GST compensation, emphasis on performance-based transfers, and preparation for 16th Finance Commission.

5-Minute Revision

The constitutional architecture of center-state financial relations rests on Articles 268-293, creating a sophisticated system of tax sharing, grants, and coordinated expenditure. Article 268 assigns certain Union-levied duties to states, Article 269 covers taxes collected by Union but assigned to states (including GST under 269A), Article 270 deals with divisible pool taxes shared between center and states, and Article 280 mandates Finance Commission every five years.

The Finance Commission evolution from 1st (1952) to 15th (2020) shows changing priorities from basic population-income criteria to performance-based incentives including demographic performance and environmental conservation.

The 15th FC maintained 41% devolution while introducing new criteria: income distance (45%), population 2011 (15%), population 1971 (10%), area (15%), forest cover (10%), demographic performance (12.5%).

GST implementation through 101st Amendment revolutionized federal finance by creating unified market through GST Council (Article 279A) with cooperative decision-making (center 1/3 weight, states 2/3 weight, three-fourths majority required).

The compensation mechanism guaranteed states 14% revenue growth for five years, funded through dedicated cess. COVID-19 exposed system vulnerabilities when compensation payments were delayed, leading to center-state disputes and eventual resolution through extended compensation period.

Key challenges include persistent vertical fiscal imbalance (center collects ~60% taxes, spends ~40%; states collect ~40%, spend ~60%), horizontal imbalances between rich and poor states, growing use of non-shareable cesses and surcharges reducing effective devolution, and implementation difficulties in centrally sponsored schemes.

Recent trends emphasize cooperative federalism, performance-based transfers, climate change integration, and digital governance coordination. Landmark judgments include State of West Bengal vs Union of India (1963) on federal balance, S.

R. Bommai (1994) on financial coercion limits, and recent cases on cess limitations. Current affairs connections include 15th FC recommendations implementation, GST compensation resolution, and preparation for 16th Finance Commission with likely focus on climate finance and urban governance.

Prelims Revision Notes

1
Constitutional Articles: 268 (Union duties assigned to states), 269 (Union taxes assigned to states), 269A (GST), 270 (shared taxes), 280 (Finance Commission), 282 (grants beyond legislative competence)
2
Finance Commission Facts: 15th FC (2020-25), 41% devolution, Chairman N.K. Singh, new criteria demographic performance (12.5%) and forest cover (10%)
3
GST Structure: 101st Amendment (2016), Article 279A (GST Council), CGST+SGST+IGST, compensation 14% growth for 5 years
4
GST Council: Constitutional body, Union FM Chairman, weighted voting (Union 1/3, States 2/3), three-fourths majority
5
Key Numbers: Vertical imbalance (Center 60% collection-40% expenditure, States 40% collection-60% expenditure)
6
Non-shareable: Cesses and surcharges retained by Union, reducing effective devolution
7
CSS Funding: Various ratios (60:40, 50:50), Article 282 basis
8
Recent Developments: COVID-19 compensation disputes, 16th FC preparation, climate finance integration

Mains Revision Notes

1
Conceptual Framework: Fiscal federalism balancing national unity with regional autonomy, vertical and horizontal fiscal imbalances, cooperative vs competitive federalism models
2
Constitutional Evolution: From Government of India Act 1935 to current system, 101st Amendment impact, changing Finance Commission criteria reflecting national priorities
3
Institutional Mechanisms: Finance Commission as independent constitutional body, GST Council as cooperative federalism model, centrally sponsored schemes for national priority implementation
4
Contemporary Challenges: COVID-19 impact on federal finances, GST compensation disputes, climate change integration, digital governance coordination, fiscal consolidation pressures
5
Policy Analysis: Performance-based transfers vs needs-based equity, conditional vs unconditional transfers, state autonomy vs national priorities balance
6
Comparative Perspectives: Different Finance Commission approaches, international federal finance models, evolution from centralized to cooperative federalism
7
Implementation Issues: CSS coordination problems, fund flow delays, monitoring and evaluation challenges, capacity building requirements
8
Future Directions: 16th Finance Commission preparations, climate finance integration, urban governance challenges, technology-enabled coordination

Vyyuha Quick Recall

Vyyuha Quick Recall - 'FISCAL BRIDGE': F(Finance Commission Article 280), I(Income distance 45% weight), S(Shared taxes Article 270), C(Centrally sponsored schemes), A(Article 282 grants), L(Legislative cooperation GST), B(Balance 41% devolution), R(Revenue sharing mechanisms), I(IGST for inter-state), D(Demographic performance 12.

5%), G(GST Council Article 279A), E(Environmental forest cover 10%). Remember the constitutional trinity: 268 (assigned duties), 269 (assigned taxes), 270 (shared taxes). GST Council voting: 'One-third Union, Two-thirds States, Three-fourths Majority'.

Finance Commission cycle: 'Every Five Years, Five-member body, Five criteria categories'.