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Financial Relations — Centre–State
4.1 Tax Distribution
India's Consolidated Fund of India receives all central tax revenues; states have their own Consolidated Funds. The Constitution mandates sharing of certain taxes:
Taxes wholly going to states (Article 268): Stamp duties on bills of exchange etc. (collected by Centre but kept by states)
Taxes shared between Centre and States (Articles 269–270):
- Income tax on individuals
- Corporation tax
- Customs duties
- Central excise duties
- All taxes covered by 7th Schedule List I (shared as per Finance Commission recommendation)
The 15th Finance Commission (2020–26): Recommended 41% of divisible pool to states (versus 42% by 14th FC — 1% deducted as transition cost for J&K reorganisation). Cesses and surcharges — a growing share of central revenues — are not part of the divisible pool. This is a major grievance of state governments.
4.2 Finance Commission (Article 280)
Constituted every five years by the President. Its mandate is to recommend:
- Distribution of net proceeds of taxes between Union and states (and states' share among themselves)
- Grants-in-aid to states from the Consolidated Fund of India
- Any other matter referred by the President in the interest of sound finance
The 16th Finance Commission was constituted in 2024 to recommend for the period 2026–31.
4.3 Grants-in-Aid
Article 275: Parliament may grant money to states (as charged expenditure from the CFI) — for promoting the welfare of Scheduled Tribes or raising standard of administration in scheduled areas.
Article 282: Both Centre and states can make grants for public purposes even if not covered by their respective lists — used for central sector schemes and centrally sponsored schemes.
4.4 State's Borrowing Powers
Article 293 allows states to borrow within India (not abroad) against the security of Consolidated Fund. If a state has outstanding loans from the Centre, it cannot borrow without Central consent. This gives the Centre significant leverage over fiscally stressed states.
FRBM Act (Fiscal Responsibility and Budget Management Act 2003) applies to both Centre and states — limits fiscal deficit and mandates medium-term fiscal plans.