Article 269

Article 269 of the Constitution of India establishes the framework under which certain taxes, though levied and collected by the Union Government, are assigned to the States. This provision ensures an equitable sharing of revenue between the Union and the States and serves as a crucial instrument of fiscal federalism, balancing central control with State financial interests.

Background and Constitutional Context

The Indian Constitution divides the powers of taxation between the Union and the States under the Seventh Schedule. While the Union List grants Parliament powers to levy taxes of national importance, the State List empowers the States to levy taxes within their territories. However, certain taxes—particularly those that have an inter-State character—are levied and collected by the Union to maintain uniformity, but their proceeds are assigned to the States.
Article 269 provides the constitutional basis for such taxes, ensuring that while the Union maintains administrative control, the revenue benefits accrue to the States. This arrangement reflects the federal principle of cooperation and avoids conflicts over taxation jurisdiction.

Text and Structure of Article 269

Article 269, as it originally stood, outlined the following:

1. Clause (1): Certain duties and taxes mentioned in the Union List are levied and collected by the Government of India but assigned to the States within which they are leviable.
2. Clause (2): The net proceeds of these taxes are assigned to the States and do not form part of the Consolidated Fund of India.
3. Clause (3): Parliament is empowered to determine the principles for deciding when a sale, purchase, or consignment of goods takes place in the course of inter-State trade or commerce.

This structure ensures that both the legislative authority and the administrative control over such taxes rest with the Union, while the States receive the proceeds as part of their financial entitlement.

Taxes and Duties Covered Under Article 269

Before the introduction of the Goods and Services Tax (GST) in 2017, Article 269(1) applied to several specific taxes and duties. These included:

• Duties on succession to property other than agricultural land.
• Estate duty on property other than agricultural land.
• Terminal taxes on goods or passengers carried by railways, sea, or air.
• Taxes on railway fares and freights.
• Taxes on transactions in stock exchanges and futures markets (excluding stamp duties).
• Taxes on the sale or purchase of newspapers and on advertisements therein.
• Taxes on the sale or purchase of goods in inter-State trade or commerce.
• Taxes on the consignment of goods (excluding export) in inter-State trade or commerce.

The most important among these were the inter-State sales taxes, which played a key role in revenue distribution before being replaced by the Integrated Goods and Services Tax (IGST) under Article 269A.

Distribution of Proceeds

Under Article 269(2), the net proceeds from these taxes, after deducting collection costs, are assigned to the States where such taxes are leviable. Parliament determines the method and principles for distributing these proceeds among the States.
The Constitution (Sixth Amendment) Act, 1956 revised Article 269 to include inter-State trade and commerce taxes, while the One Hundred and First Amendment Act, 2016 later modified this framework to incorporate the GST system.

Role of Parliament Under Article 269(3)

Clause (3) of Article 269 grants Parliament the power to formulate principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce. This provision prevents ambiguity in defining what constitutes inter-State transactions.
The Central Sales Tax Act, 1956 (CST Act) was enacted under this authority. It provided uniform rules for:

• Determining when a sale or purchase qualifies as inter-State.
• Regulating taxation on inter-State sales.
• Ensuring that no State imposes double taxation on goods sold across State borders.

The CST framework maintained the constitutional objective of tax uniformity while ensuring that the States received the revenue generated from inter-State commerce.

Evolution and Constitutional Amendments

The taxation scheme under Article 269 underwent several transformations over time:

• Before GST: Taxes on inter-State trade and commerce (Central Sales Tax) were levied and collected by the Union but assigned to the States.
• After the 101st Amendment (2016): Article 269A replaced the earlier system, introducing the Integrated Goods and Services Tax (IGST), which applies to inter-State supplies of goods and services.
• Taxes such as estate duty and succession duty have since been abolished, simplifying India’s tax structure.

Despite these changes, the principle of Union levy with State appropriation continues under the GST framework through Article 269A.

Judicial Interpretation and Case Law

Several judicial pronouncements have clarified the scope and application of Article 269:

• State of West Bengal v. Kesoram Industries Ltd. (2004) 10 SCC 201: The Supreme Court examined the distinction between taxes on goods and taxes on trade or commerce, reaffirming that inter-State trade taxation falls within the Union’s competence under Article 269.
• Union of India v. K.S. Venkatesh (2000): The Court discussed the nature of taxes collected under Article 269, emphasising that though collected by the Union, such taxes constitutionally belong to the States.
• State of Karnataka v. A.S.S.K.S.S.S. (2000): The Court interpreted the mechanisms for distributing proceeds among States and upheld Parliament’s authority to determine the principles for such distribution.

These cases collectively affirm the federal balance embedded in Article 269, ensuring both central oversight and State financial benefit.

Relationship with Other Fiscal Articles

Article 269 functions alongside other constitutional provisions that regulate the distribution of revenue between the Union and the States:

• Article 268: Deals with duties levied by the Union but collected and appropriated by the States.
• Article 270: Provides for taxes levied and collected by the Union and distributed between the Union and the States.
• Article 269A: Introduced by the 101st Amendment, governs taxes on inter-State supplies of goods and services under the GST system.

Together, these Articles form the core of India’s intergovernmental fiscal framework, ensuring coordination and fairness in revenue sharing.

Significance of Article 269

Article 269 holds enduring significance in India’s constitutional and fiscal design:

• Promotes Cooperative Federalism: By enabling States to share in the proceeds of centrally levied taxes, it fosters intergovernmental cooperation.
• Ensures Fiscal Balance: It strengthens the financial position of the States without undermining national tax uniformity.
• Facilitates Economic Integration: By assigning inter-State taxation to the Union, it prevents overlapping jurisdictions and trade barriers between States.
• Encourages Legislative Coordination: Parliament’s authority to frame principles of inter-State trade ensures consistency and transparency in taxation.

Challenges in Implementation

Despite its strengths, Article 269 has faced practical challenges:

• Definitional Ambiguities: Determining what constitutes “inter-State trade or commerce” has been complex, leading to interpretative disputes.
• Administrative Overlaps: Coordination between Union and State tax authorities occasionally led to delays or conflicts.
• Revenue Allocation Disputes: Differences among States regarding the distribution formula for assigned taxes required continuous parliamentary and executive negotiation.

Transition to the GST Framework

The introduction of the Goods and Services Tax (GST) in 2017 marked a paradigm shift in the taxation structure, effectively subsuming most of the taxes that earlier fell under Article 269. The Integrated Goods and Services Tax (IGST), governed by Article 269A, now covers inter-State transactions of goods and services, maintaining the same principle of Union collection and State appropriation.
While Article 269’s scope has narrowed in the GST era, its underlying principles — fiscal equity, cooperative federalism, and centralised uniformity with decentralised benefits — remain central to India’s financial system.