Introduction and Constitutional Basis
The Financial Relations between the Union and the States are defined under Part XII (Articles 268 to 293) of the Indian Constitution. These provisions outline the distribution of financial powers, revenue sharing, and borrowing rights to maintain a balanced federal system. The objective is to ensure economic coordination and fiscal independence for both levels of government. While the Union controls major sources of revenue such as income tax, customs, and excise duties, the States are empowered to levy taxes on property, goods, and local services. The Constitution thus establishes a cooperative financial framework, allowing both the Centre and the States to perform their functions effectively without financial dependency.
Constitutional Provisions and Distribution
The financial relations are broadly categorized into three areas—the distribution of tax revenues, grants-in-aid, and borrowing powers. Under Article 268, certain duties like stamp duties and excise on medicinal preparations are levied by the Union but collected by the States. Article 270 provides for the sharing of income tax between the Centre and the States. Article 275 empowers Parliament to provide grants-in-aid to States requiring financial assistance. The Finance Commission, constituted under Article 280, recommends the formula for revenue distribution. Additionally, Articles 292 and 293 regulate the borrowing powers of the Union and States, maintaining fiscal discipline and intergovernmental financial stability.
Importance and Constitutional Objective
The purpose of defining financial relations is to maintain fiscal balance and ensure economic unity within India’s federal framework. It prevents conflicts over financial resources and promotes cooperative federalism by ensuring that both the Centre and States have adequate funds to fulfill their constitutional responsibilities. The system also enables resource equalization through grants and recommendations of the Finance Commission, ensuring that economically weaker States are supported. This structure thus serves the dual goal of maintaining national integrity and promoting regional equity, ensuring uniform development across the country.
Real-Time Example
A real-time example of Centre-State financial relations can be seen in the 15th Finance Commission (2020–2025) recommendations. It allocated 41% of the divisible tax pool to States, adjusting for the creation of Jammu & Kashmir and Ladakh as Union Territories. The Commission also recommended performance-based grants for health, education, and disaster management. Similarly, during the COVID-19 pandemic, the Centre released additional grants-in-aid under Article 275 to assist financially weaker States in managing healthcare and welfare programs. This demonstrates how financial relations adapt to changing economic conditions to maintain fiscal federalism.
Mnemonic to Remember – “BIG FUND”
B – Borrowing powers (Articles 292–293)
I – Income tax sharing (Article 270)
G – Grants-in-aid (Article 275)
F – Finance Commission (Article 280)
U – Union levies, State collection (Article 268)
N – National fiscal coordination
D – Distribution of revenue between Centre and States
The mnemonic “BIG FUND” helps recall the key elements of Financial Relations—balancing power, revenue, and development between the Union and the States for effective federal functioning.
About lawgnan:
Explore the Financial Relations between the Union and the States in depth at Lawgnan.in, your reliable guide to constitutional law. Understand how Articles 268 to 293 define India’s federal financial structure through revenue sharing, grants-in-aid, and borrowing powers. Learn the role of the Finance Commission (Article 280) in maintaining fiscal balance and promoting cooperative federalism. This article simplifies complex concepts like tax distribution, income sharing, and fiscal discipline, offering clarity for law students, UPSC aspirants, and judiciary exam candidates. Strengthen your grasp of India’s financial federalism and its constitutional mechanisms for balanced economic growth.
