Financial Relations — Revision Notes
⚡ 30-Second Revision
- Articles 268-293: Centre-State financial framework
- Article 280: Finance Commission every 5 years
- Article 270: Tax sharing - 41% to States (15th FC)
- Article 246A: GST concurrent power
- GST Council: 1/3 Centre, 2/3 States voting
- CSS funding: 60:40 general, 90:10 special category
- 15th FC: ₹1.75 lakh crore performance incentives
- Cesses/surcharges: Not shared with States
- Article 293: State borrowing needs Centre consent
- Finance Commission criteria: Income distance (45%), Population (15%), Area (15%)
2-Minute Revision
Centre-State financial relations operate through constitutional framework (Articles 268-293) dividing tax powers and mandating revenue sharing. Finance Commission (Article 280) recommends tax devolution every 5 years - currently 41% of divisible Central taxes go to States.
Key institutions: Finance Commission for tax sharing and grants; GST Council (Article 279A) for indirect tax coordination with weighted voting (Centre 1/3, States 2/3). Tax classification: Union taxes (income, customs) shared; State taxes (land revenue, excise) retained; cesses/surcharges not shared.
Centrally Sponsored Schemes follow 60:40 funding for general States, 90:10 for special category. 15th Finance Commission innovations: performance incentives (₹1.75 lakh crore), climate action grants, local body funding (₹4.
36 lakh crore). Current challenges: increasing cess reliance by Centre, GST compensation disputes, digital economy taxation. State borrowing under Article 293 requires Central consent when previous loans outstanding.
5-Minute Revision
Centre-State financial relations form the backbone of Indian federalism through constitutional provisions (Articles 268-293) that balance national integration with State autonomy. The system addresses vertical fiscal imbalance (Centre's superior tax capacity vs State expenditure needs) and horizontal fiscal equalization (reducing inter-state disparities).
Finance Commission (Article 280) serves as constitutional arbiter, recommending tax devolution and grants every five years. The 15th Finance Commission maintained 41% devolution while introducing performance incentives worth ₹1.
75 lakh crore for power reforms, ease of business, and SDGs. Tax classification includes Union taxes (income tax, customs, corporation tax) that are shared, State taxes (land revenue, state excise, stamp duty) retained by States, and problematic cesses/surcharges that aren't shared.
GST revolution through 101st Amendment created Article 246A (concurrent taxation) and GST Council with weighted voting ensuring cooperative federalism. Centrally Sponsored Schemes operate on differential funding: 60:40 for general category States, 90:10 for northeastern and special category States.
Key challenges include Centre's increasing reliance on non-shareable cesses, GST compensation disputes post-2022, digital economy taxation complexities, and climate financing needs. Recent developments: 15th FC's performance-based approach, GST compensation cess extension debates, COVID-19 fiscal response allowing 4% borrowing limit.
The system exemplifies cooperative federalism through institutions like Finance Commission and GST Council while maintaining competitive elements through performance incentives.
Prelims Revision Notes
- Constitutional Articles: 268 (Union levied, State collected), 269 (Union levied, State assigned), 270 (shared taxes), 275-282 (grants), 280 (Finance Commission), 293 (State borrowing), 246A (GST concurrent), 279A (GST Council)
- Finance Commission: 5-year tenure, Chairman + 4 members, 15th FC (2020-25) recommended 41% devolution
- Tax Classification: Union List (income tax, customs, corporation tax, excise), State List (land revenue, state excise, stamp duty), Concurrent (GST)
- 15th FC Criteria: Income distance 45%, Population 2011 15%, Area 15%, Forest cover 10%, Demographic performance 12.5%, Tax effort 2.5%
- GST Council: Union FM (Chairman), all State FMs, weighted voting (Centre 1/3, States 2/3), 3/4 majority required
- CSS Funding: General category 60:40, Special category 90:10, UTs 100% Central
- Special Category States: All northeastern, Himachal Pradesh, Uttarakhand, J&K (till 2019)
- Non-shareable: Cesses, surcharges, fines, penalties
- 15th FC Recommendations: ₹1.75 lakh crore performance incentives, ₹4.36 lakh crore local body grants
- Current Issues: GST compensation cess ended June 2022, digital economy taxation, climate financing
Mains Revision Notes
- Federal Finance Evolution: From Government of India Act 1935 to GST era, shift from competitive to cooperative federalism
- Institutional Framework: Finance Commission as constitutional arbiter, GST Council as cooperative institution, NITI Aayog replacing Planning Commission
- 15th Finance Commission Innovations: Performance-based transfers linking fiscal devolution to governance outcomes, climate action incentives, demographic performance rewards
- Contemporary Challenges: Centre's cess reliance reducing shareable pool, GST compensation disputes affecting federal trust, digital economy challenging territorial taxation
- Cooperative Federalism Models: GST Council consensus-building, Finance Commission multi-criteria approach, CSS shared responsibility
- Fiscal Federalism Principles: Vertical fiscal imbalance correction, horizontal fiscal equalization, subsidiarity in service delivery
- Reform Imperatives: Cess sharing mechanisms, sunset clauses for cesses, digital economy taxation framework, climate financing integration
- International Comparisons: German fiscal equalization, Canadian transfer system, Australian GST model
- Constitutional Amendments Impact: 80th Amendment mandatory tax sharing, 101st Amendment GST transformation
- Future Directions: 16th Finance Commission preparation, performance federalism expansion, green fiscal federalism development
Vyyuha Quick Recall
Vyyuha Quick Recall - 'FIGS CAMP': F-Finance Commission (280, 5 years, 41%), I-Income distance (45% weight), G-GST Council (1/3 Centre, 2/3 States), S-Shared taxes (270), C-CSS funding (60:40, 90:10), A-Articles (268-293), M-Money grants (275-282), P-Performance incentives (₹1.75 lakh crore). Remember '41-45-15' for key numbers: 41% devolution, 45% income distance weight, 15% population weight.