Article 270

Article 270 of the Constitution of India lays down the principles governing the distribution of taxes and duties between the Union and the States. It serves as a cornerstone of India’s fiscal federalism, ensuring that both levels of government have access to adequate financial resources for fulfilling their respective constitutional responsibilities. The Article establishes a structured mechanism for the sharing of centrally collected revenues with the States, promoting balanced economic development and cooperative federalism.

Constitutional Background

The framers of the Indian Constitution recognised that while the Union required substantial resources to discharge its national and defence functions, the States needed steady revenue streams to fund welfare and developmental activities. However, since many of the productive sources of taxation were assigned to the Union under the Union List, Article 270 was introduced to ensure that a portion of the Union’s tax revenues would be shared with the States according to a constitutionally prescribed process.
This mechanism not only promotes financial equity but also sustains the fiscal independence of States, enabling them to execute their constitutional obligations effectively.

Structure and Key Provisions of Article 270

Article 270 provides for the levy, collection, and distribution of certain taxes and duties between the Union and the States. It has evolved through constitutional amendments, particularly the 80th Amendment (2000) and the 101st Amendment (2016), which redefined the scope of shared taxes after the introduction of the Goods and Services Tax (GST).

Clause (1): Scope of Shared Taxes

• Taxes and duties specified in the Union List, except those mentioned in Articles 268, 269, and 269A, fall under the ambit of Article 270.
• These taxes are levied and collected by the Government of India but are shared with the States.
• The taxes include all major central taxes such as income tax, corporation tax, customs duties, and Union excise duties (excluding items assigned exclusively to the Union or States).
• The Article also allows for the inclusion of surcharges (Article 271) and cesses enacted by Parliament for specific purposes.

Through this provision, the Constitution ensures that States receive a constitutionally mandated share in national tax revenues.

Clause (2): Distribution of Net Proceeds

Clause (2) provides that a certain percentage of the net proceeds of the taxes referred to in Clause (1) shall be distributed between the Union and the States.

• The “net proceeds” refer to the total revenue collected, minus the cost of collection.
• The share of the States and the principles governing distribution among them are determined by the President of India, acting on the recommendations of the Finance Commission.
• The portion of the Union’s tax revenue assigned to the States is credited directly to the Consolidated Fund of the States, ensuring financial autonomy.

Clause (3): Role of the President and the Finance Commission

Clause (3) specifies how the distribution of tax proceeds is determined:

1. Before the constitution of the Finance Commission, the President may issue an order prescribing the manner of distribution.
2. After the Finance Commission is constituted, the President issues such orders based on the Commission’s recommendations.

This ensures that the process remains transparent, consultative, and anchored in expert advice rather than executive discretion.

The Role of the Finance Commission

The Finance Commission, established under Article 280, plays a central role in operationalising Article 270. It recommends:

• The percentage of the divisible pool of taxes to be allocated to the States.
• The inter se distribution among the States based on criteria such as population, area, income distance, fiscal discipline, and tax effort.
• Grants-in-aid to States requiring additional financial support.

The recommendations of the Finance Commission form the constitutional basis for tax devolution and ensure that fiscal transfers are equitable and performance-driven.

Related Constitutional Articles

Article 270 functions alongside several other provisions that collectively regulate the fiscal relationship between the Union and the States:

• Article 268: Duties levied by the Union but collected and appropriated by the States.
• Article 269: Taxes levied and collected by the Union but assigned to the States.
• Article 269A: Taxes on inter-State trade or commerce under the GST regime.
• Article 271: Power of the Union to levy surcharges on certain taxes for its exclusive use.
• Article 280: Establishes the Finance Commission to recommend distribution of revenues between the Union and the States.

Together, these Articles form a comprehensive framework for fiscal coordination in India’s federal structure.

Evolution Through Constitutional Amendments

Over the years, Article 270 has undergone significant changes to reflect evolving fiscal realities:

• The 80th Constitutional Amendment Act (2000):
  • Implemented the recommendations of the Tenth Finance Commission.
  • Consolidated most Union taxes into a divisible pool, allowing States to share a fixed percentage (then 29%) of the net proceeds of all central taxes and duties.
  • Replaced the earlier system of tax-specific sharing with a more unified revenue-sharing mechanism.
• The 101st Constitutional Amendment Act (2016):
  • Introduced the Goods and Services Tax (GST) framework, subsuming many central and State indirect taxes.
  • Excluded taxes under Articles 268, 269, and 269A (including GST on inter-State trade) from the scope of Article 270.
  • Revised the divisible pool to exclude revenues from GST and certain cesses.

These amendments modernised India’s fiscal federal structure and ensured greater flexibility in revenue distribution.

Judicial Interpretation and Case Law

Several landmark judicial decisions have elaborated on the interpretation and application of Article 270:

• State of West Bengal v. Union of India (1963): The Supreme Court clarified that taxation powers and revenue distribution between the Union and the States must strictly follow the constitutional scheme to preserve the federal balance.
• K.K. Verma v. Union of India (1954): The Court highlighted that taxation powers are constitutionally demarcated to prevent legislative overlap.
• Union of India v. State of Kerala (1970): The Court upheld the constitutional validity of revenue distribution mechanisms under Article 270, affirming the role of the Finance Commission in maintaining fiscal equity.

These judgments underscore that fiscal federalism in India is guided by both constitutional mandate and judicial oversight.

Significance of Article 270

Article 270 plays a pivotal role in India’s financial and constitutional system:

• Strengthens Fiscal Federalism: It institutionalises financial cooperation between the Union and the States, ensuring that both levels of government have access to resources.
• Ensures Equitable Resource Distribution: The Finance Commission’s recommendations aim to reduce regional disparities and promote balanced economic development.
• Supports Democratic Accountability: The transparent process of revenue sharing enhances fiscal responsibility and public trust.
• Facilitates Cooperative Federalism: By mandating shared revenues, the provision promotes partnership and coordination in national fiscal management.

Practical Implications

• The share of States in the divisible pool of central taxes has gradually increased over successive Finance Commissions — from 29% (10th Finance Commission) to 42% (14th Finance Commission) and 41% (15th Finance Commission), reflecting a growing emphasis on State financial autonomy.
• The funds transferred under Article 270 form a substantial portion of State revenues, influencing their capacity to finance development programmes, social welfare schemes, and infrastructure projects.
• The mechanism supports decentralised planning, enabling States to align spending with local needs and priorities.

Challenges and Issues

Despite its success, Article 270 presents some ongoing challenges:

• Dependence on the Union: Many States remain heavily reliant on central transfers, affecting fiscal independence.
• Cesses and Surcharges: Increasing use of cesses and surcharges, which are not shared with the States, has reduced the size of the divisible pool.
• Inter-State Disparities: Differences in fiscal capacity among States persist, requiring continuous adjustment in the devolution formula.
• Delays in Transfers: Timely release of funds and efficient utilisation remain practical concerns.