Part XII: Finance, Property, Contracts and Suits

Article 270: Taxes levied and distributed between the Union and the States

Overview of Article 270: Taxes levied and distributed between the Union and the States

Original Article:

(1) All taxes and duties referred to in the Union List, except the duties and taxes referred to in Articles 268, 269 and 269A, surcharge on taxes and duties referred to in Article 271 and any cess levied for specific purposes under any law made by Parliament shall be levied and collected by the Government of India and shall be distributed between the Union and the States in the manner provided in Clause (2).

(1A) The tax collected by the Union under Clause (1) of Article 246A shall also be distributed between the Union and the States in the manner provided in Clause (2).

(1B) The tax levied and collected by the Union under Clause (2) of Article 246A and Article 269A, which has been used for payment of the tax levied by the Union under Clause (1) of Article 246A, and the amount apportioned to the Union under Clause (1) of Article 269A, shall also be distributed between the Union and the States in the manner provided in Clause (2).

(2) Such percentage, as may be prescribed, of the net proceeds of any such tax or duty in any financial year shall not form part of the Consolidated Fund of India, but shall be assigned to the States within which that tax or duty is leviable in that year, and shall be distributed among those States in such manner and from such time as may be prescribed in the manner provided in Clause (3).

(3) In this article, "prescribed" means—

  • Until a Finance Commission has been constituted, prescribed by the President by order;
  • After a Finance Commission has been constituted, prescribed by the President by order after considering the recommendations of the Finance Commission.

Explanations:

Article 270 governs the distribution of taxes and duties collected by the Union between the Union and the States. It ensures a financial framework that supports both national and state development, reflecting the principles of cooperative federalism.

Clause-by-Clause Explanation:

Clause (1): General Tax Collection Framework

All taxes in the Union List, except those excluded under Articles 268, 269, and 269A, are levied and collected by the Union but distributed to the States as prescribed.

Real-Life Example: Income tax collected by the Union is shared with States to fund local projects like schools and roads.

Clause (1A): GST Revenue Sharing

Taxes collected under Article 246A(1) are distributed between the Union and States.

Real-Life Example: GST collected on goods sold in Delhi is shared with Delhi’s government for public welfare programs.

Clause (1B): Compensation for GST Collections

Revenue collected under Articles 246A(2) and 269A is distributed to ensure States’ financial stability under the GST regime.

Real-Life Example: GST collected on inter-State transactions is allocated to ensure no revenue shortfall for the participating States.

Clause (2): Allocation of Net Tax Proceeds

This clause mandates that a percentage of the net tax proceeds is assigned to the States and not added to the Consolidated Fund of India.

Real-Life Example: Taxes collected on corporate profits are proportionally allocated to States for local economic initiatives.

Clause (3): Role of Finance Commission

The Finance Commission advises the President on tax-sharing ratios and ensures equitable distribution among States.

Real-Life Example: Finance Commission recommendations guide how income tax revenue is allocated between wealthier and less developed States.

Historical Significance:

Article 270 has evolved through various amendments to align with India’s economic reforms, ensuring that States receive adequate resources for development while maintaining a balance of fiscal power between the Union and States.

Debates and Deliberations:

On August 5, 1949, the Constituent Assembly debated Article 251 of the Draft Constitution, which later became Article 270. Discussions focused on the principles for revenue sharing between the Union and the States. Members addressed regional disparities, emphasizing the need for equitable distribution of income tax revenues.

Mr. Upendra Nath Barman proposed a fixed percentage allocation formula, suggesting that 60% of income tax proceeds should go to the States. He outlined a distribution framework: 33.33% based on population, 58.33% on collection, and 8.33% as prescribed, arguing this would aid State development planning.

Dr. B.R. Ambedkar opposed rigid percentages, advocating flexibility through Presidential orders based on Finance Commission recommendations. He cautioned that fixed allocations could lead to disputes among States with differing fiscal capacities.

Prof. Shibban Lal Saksena suggested that Parliament, not the President, should determine tax distribution by law to ensure accountability. Dr. Ambedkar countered, highlighting the risks of disproportionate influence by States with larger parliamentary representation.

Mr. Biswanath Das discussed historical inequities in revenue sharing, citing British policies that disadvantaged smaller provinces. He referenced recommendations from the Expert Committee chaired by N.R. Sarker to prioritize equitable distribution.

Ultimately, the Assembly favored flexibility, empowering the President to prescribe allocations based on Finance Commission advice, thus ensuring regional fiscal equity and addressing economic disparities.

References:

  • Constituent Assembly Debates, August 5, 1949
  • N.R. Sarker Committee Reports
  • Commentary on the Constitution of India by D.D. Basu
Article 269a Article 271