Article 268

Article 268 of the Constitution of India establishes a distinctive fiscal arrangement under which certain Union duties are levied by the Central Government but collected and appropriated by the State Governments. This provision promotes fiscal cooperation between the Union and the States by ensuring uniformity in taxation policy while simultaneously providing the States with an independent source of revenue.

Constitutional Framework and Scope

Article 268 is part of Part XII of the Constitution, which deals with Finance, Property, Contracts, and Suits. It addresses specific duties listed in the Union List of the Seventh Schedule, which the Union Government levies for reasons of uniformity, but whose collection and revenue appropriation are assigned to the States.
The Article reads:

“Such stamp duties and such duties of excise on medicinal and toilet preparations as are mentioned in the Union List shall be levied by the Government of India but shall be collected—(a) in the case where such duties are leviable within any Union Territory, by the Government of India, and(b) in other cases, by the States within which such duties are respectively leviable.The proceeds in any State shall not form part of the Consolidated Fund of India but shall be assigned to that State.”

Thus, Article 268 identifies specific duties that, although national in nature, are fiscally devolved to the States for collection and use.

Types of Duties Covered Under Article 268

Article 268 applies to two categories of duties specifically enumerated in the Union List (List I, Seventh Schedule):

1. Stamp Duties – covered under Entry 91, List I, relating to bills of exchange, cheques, promissory notes, insurance policies, transfer of shares, and other similar instruments not included in the State List.
2. Excise Duties on Medicinal and Toilet Preparations – covered under Entry 84, List I, particularly those containing alcohol, narcotics, or other intoxicating substances.

These duties are levied uniformly across India to avoid inconsistency among States in matters that affect trade, commerce, and industry, but the proceeds from their collection are assigned to the respective States to strengthen their fiscal autonomy.

Mechanism of Levy, Collection, and Appropriation

The system established by Article 268 involves a division of fiscal responsibility:

• Levy of Duties: The power to impose and define the duties rests solely with the Union Government. Parliament determines the scope, rate, and manner of imposition through legislation.
• Collection of Duties:
  • In Union Territories, the Union Government collects these duties.
  • In States, the respective State Governments are responsible for their collection.
• Appropriation of Proceeds: The proceeds collected in a State are credited directly to the Consolidated Fund of that State and do not form part of the Consolidated Fund of India.

This mechanism provides States with a source of assured revenue from duties that are centrally legislated, ensuring both national uniformity and State-level fiscal benefit.

Nature and Characteristics of Duties Under Article 268

• Centrally Levied, State Collected: Duties are imposed uniformly by the Centre to maintain consistency across India.
• State Appropriation: The collected revenue belongs to the State in which it is realised, enhancing the State’s financial resources.
• Limited Scope: Only the duties explicitly mentioned in the Union List — namely, specific stamp duties and excise duties on medicinal and toilet preparations — fall within this Article.
• Exclusion from the Consolidated Fund of India: The revenue from these duties bypasses the Union’s central accounts and goes directly to State treasuries.

Objectives and Rationale

The framers of the Constitution introduced Article 268 with the following objectives:

• To ensure uniformity in taxation on items of national importance.
• To prevent inter-State variations in duties that could disrupt commerce and trade.
• To enable financial devolution to the States by assigning them the revenue from such duties.
• To maintain fiscal harmony within India’s quasi-federal system.

This arrangement reflects the principle of cooperative federalism, balancing the need for central coordination in tax policy with the financial autonomy of States.

Distinction Between Articles 268 and 269

While Articles 268 and 269 both deal with Union taxes assigned to the States, they differ in key respects:

This distinction ensures a clear separation of fiscal responsibilities and revenue flows between the Centre and the States.

Relevant Constitutional Entries

The duties under Article 268 correspond to the following entries in the Union List of the Seventh Schedule:

• Entry 84: Duties of excise on medicinal and toilet preparations containing alcohol, narcotics, or similar substances.
• Entry 91: Stamp duties on instruments such as bills of exchange, promissory notes, insurance policies, and transfer of shares.

The inclusion of these items in the Union List ensures national uniformity, while their assignment to States for collection provides decentralised fiscal empowerment.

Judicial Interpretation and Case Law

Several judicial decisions have clarified the scope and application of Article 268:

• State of Madhya Pradesh v. Bhailal Bhai (1964 AIR 1006): The Supreme Court held that excise duties collected without proper authority under Article 268 could be subject to refund, reaffirming the constitutional principle that all taxation must have legislative sanction.
• State of West Bengal v. Kesoram Industries Ltd. (2004) 10 SCC 201: The Court examined the distinction between excise duties and other forms of taxation, affirming that excise duties under Article 268 are limited to production and not on sale.
• Bharat Barrel & Drum Manufacturing Co. Ltd. v. Collector of Central Excise (1999) 3 SCC 35: The Court discussed excise duties on medicinal and toilet preparations, explaining that such duties, though imposed by the Union, are collected by the States under the constitutional scheme.

These cases collectively reaffirm that Article 268 duties are constitutionally distinct and serve as a mechanism for State-level fiscal empowerment within a centrally designed tax framework.

Administrative and Fiscal Management

The Central Government, through its legislative and regulatory authority, prescribes the rates and procedures for levying these duties. State Governments, acting as the collecting agencies, are responsible for:

• Collection and accounting of revenues;
• Ensuring compliance with the Union’s prescribed procedures; and
• Transferring proceeds to the Consolidated Fund of the State.

The Finance Commission does not play a direct role in the distribution of these proceeds, as they are automatically assigned to the States without requiring apportionment.

Practical Examples

• Stamp Duties:
  • Duties on financial instruments such as cheques, bills of exchange, and promissory notes are collected by States.
  • Example: Stamp duty on the transfer of shares executed within a State is collected by that State.
• Excise Duties:
  • Duties on medicinal or toilet preparations containing alcohol, opium, or similar substances (e.g., ayurvedic or herbal tonics with alcohol content) are levied by the Union but collected by the States.

Relevance After the 80th and 101st Amendments

• The 80th Amendment (2000) rationalised the sharing of central taxes between the Union and the States by creating a divisible pool. However, duties under Article 268 continued to be assigned exclusively to the States.
• The 101st Amendment (2016) introduced the Goods and Services Tax (GST) but did not alter Article 268 duties, which remain outside the GST framework due to their specific constitutional classification.

Limitations of Article 268

• The Article applies only to specified duties, limiting its scope.
• The States cannot alter the rates or structure of these duties; they merely collect and appropriate them.
• Administrative complexity may arise in coordinating collection processes between the Union and the States.

Significance of Article 268

Article 268 plays a pivotal role in India’s fiscal architecture by:

• Promoting uniformity in taxation policy for specific goods and instruments of national importance.
• Strengthening State finances through the direct appropriation of proceeds.
• Reflecting the federal balance by integrating both central legislation and State administration in taxation.
• Upholding the principle of cooperative fiscal federalism, where both levels of government share responsibilities to ensure efficiency and equity in revenue management.