Centre-State Relations — Contents
01Overview & Nature of Indian Federalism
02Types of Federalism
03Legislative Relations (Arts. 245–255)
04Three Lists — Subjects Count & Details
05Parliament Legislating on State List — 5 Conditions
06Article 254 — Repugnancy in Concurrent List
07Centre’s Control over State Legislation
08Administrative Relations — Arts. 256–263 + Governor, State PSC, SEC
09Mutual Delegation & All India Services (Art. 312)
10Inter-State Council & Zonal Councils
11Financial Relations (Arts. 268–293)
12Finance Commission (Art. 280)
13GST & 101st Amendment
14Issues & Commission Recommendations (Sarkaria, Punchhi, NCRWC)
15Current Affairs 2024–25
16Mock Mains Questions
01 — Overview & Nature of Indian Federalism
245–263
Articles: Part XI (Leg + Admin)
268–293
Articles: Part XII (Financial)
100+61+52
Union + State + Concurrent List Subjects
7th
Schedule (Three-List System)
41%
States’ Share in Divisible Pool (15th & 16th FC)
Nature of India’s Federation
India is described as a “Union of States” (Art. 1) — NOT a federation of sovereign states. Dr. B.R. Ambedkar described it as “federal in structure but unitary in spirit.” The Constitution establishes a quasi-federal system — federal in normal times, but can become unitary in times of emergency. Residuary powers vest with the Centre (like Canada, unlike USA, Australia, Switzerland where they vest with states).
Key Cases on Federalism
- S.R. Bommai v. UOI (1994): Federalism is a Basic Feature of the Constitution. Also upheld secularism as a basic feature.
- State of West Bengal v. UOI (1962): India has a strong Centre; Parliament can legislate for the whole territory.
- State of Karnataka v. UOI (1977): Cooperative federalism requires harmonious working of both Centre and State.
Constitutional Sources
- Three-list system of legislative distribution — adopted from Government of India Act, 1935
- Residuary powers with Centre — borrowed from Canada
- Dual polity concept — influenced by the United States
- Emergency provisions affecting Centre-State relations — influenced by Weimar Republic of Germany
02 — Types of Federalism
Fiscal Federalism
Allocation of fiscal rights and responsibilities across different levels of government. E.g., Distribution of revenues between Union and States under Arts. 268–293 and Part XII. Finance Commission governs this.
Asymmetric Federalism
Different constituent units accorded different powers and autonomy. E.g., Special constitutional provisions for certain States (Arts. 371 to 371-J) — Nagaland (Art. 371A), Maharashtra & Gujarat (Art. 371), Karnataka (Art. 371J) etc.
Cooperative Federalism
Union and constituent units interact cooperatively and collectively to solve common problems. Both are constitutionally obliged to cooperate in matters specified in Schedule VII. E.g., GST Council, Inter-State Council, Finance Commission.
Competitive Federalism
Relationship among two or more states in matters of trade, investment, commerce. States compete to attract investment. E.g., NITI Aayog’s performance reports — Healthy States Progressive India, SDG Index, Ease of Doing Business rankings.
Cooperative vs Competitive Federalism
India’s Constitution emphasises cooperative federalism — inter-governmental cooperation on shared problems. Post-liberalisation, elements of competitive federalism have emerged as states compete for FDI and investment. Recent debates: GST Council as a model of cooperative federalism; NITI Aayog replacing Planning Commission to promote competitive federalism.
03 — Legislative Relations (Articles 245–255)
Territorial Jurisdiction
Parliament (Union)
- Laws for whole or any part of the territory of India (including UTs)
- Extra-territorial legislation — applicable to Indian citizens and their property in any part of the world (e.g., laws relating to succession, inheritance, or status of citizens abroad)
- Exception — Scheduled Areas (5th Schedule): The Governor of a State where a Scheduled Area is located is empowered to direct that any particular Act of Parliament shall not apply to a Scheduled Area or part thereof, OR shall apply with such modifications and exceptions as he may specify. He may also make regulations for the peace and good governance of Scheduled Areas — such regulations, however, require the assent of the President. This protects tribal interests in scheduled areas (Andhra Pradesh, Telangana, Odisha, MP, Jharkhand, Chhattisgarh, HP, Rajasthan, Gujarat).
- Exception — 6th Schedule Tribal Areas: Similarly, district/regional councils in tribal areas of Assam, Meghalaya, Tripura, Mizoram (6th Schedule) have legislative powers on specified subjects — Union/State laws require adaptation/modification for these areas.
State Legislature
- Laws only for the State in which the law has been passed
- State law cannot have extra-territorial operation
- In case of conflict with Union law: Union law prevails (Art. 254 for Concurrent List; Art. 246 for Union List)
Key Articles in Legislative Relations
| Article | Provision |
|---|---|
| Art. 245 | Extent of laws made by Parliament and by State Legislatures |
| Art. 246 | Subject matter of laws — three lists in the 7th Schedule (Union, State, Concurrent) |
| Art. 247 | Parliament may establish additional courts for better administration of laws in Union List |
| Art. 248 | Residuary powers of legislation — vested with Parliament (matters not in any list) |
| Art. 249 | Parliament may legislate on State List subject if Rajya Sabha passes resolution in national interest (2/3 majority of members present and voting) |
| Art. 250 | Parliament may legislate on State List subjects during National Emergency (Art. 352) |
| Art. 251 | Inconsistency between State law and Parliament law on Concurrent List — Parliament law prevails |
| Art. 252 | Parliament may legislate on State List subject when two or more State Legislatures request it |
| Art. 253 | Parliament may legislate on any subject (including State List) to implement international treaties and agreements |
| Art. 254 | Repugnancy of laws: If State law on Concurrent List is repugnant to Union law — Union law prevails. Exception: if State law has received Presidential assent, it may prevail in that state. |
| Art. 255 | Requirements as to recommendations and previous sanctions to be regarded as procedural only |
04 — The Three Lists (7th Schedule, Article 246)
Adopted From
The three-list system was adopted from the Government of India Act, 1935. Article 246 read with the 7th Schedule divides subjects into three lists.
| Parameter | Union List (List I) | State List (List II) | Concurrent List (List III) |
|---|---|---|---|
| Number of Subjects | 100 subjects (originally 97; 42nd Amendment added more) | 61 subjects (originally 66; reduced by amendments) | 52 subjects (originally 47; 42nd Amendment added 5 more) |
| Who can Legislate? | Parliament exclusively | State Legislature exclusively (ordinarily) | Both Parliament and State Legislatures — Parliament’s law prevails in case of conflict |
| Nature of Subjects | National importance — Defence, Foreign affairs, Atomic energy, Railways, Banking, Currency, Citizenship | Local/State importance — Public order, Police, Public health, Agriculture, Water, Land, State PSUs | Subjects of joint concern — Criminal law, Marriage & divorce, Education, Forests, Labour, Contracts, Drugs |
| Conflict Resolution | Parliament’s law always prevails over State law on Union List subjects | If Parliament legislates on State List under Arts. 249/252/253/356 — Parliament’s law prevails | Union law prevails over State law (Art. 254). Exception: State law with Presidential assent prevails in that state |
| Examples | Defence, Atomic Energy, Foreign Affairs, Citizenship, Banking, Railways, Posts, Census | Public Order, Police, Public Health, Agriculture, Water, Land, State Electricity, State PSUs, Marriage | Criminal Law (IPC), CrPC, Civil Procedure, Marriage & Divorce, Education, Forests, Labour, Bankruptcy, Economic Planning |
Art. 248 — Residuary Powers
Residuary powers (subjects NOT enumerated in any of the three lists) are vested in Parliament. This follows the Canadian model. India differs from the USA, Australia, and Switzerland — in those federations, residuary powers vest with the States. Note: Cyber laws, Space law, Gene mapping — typically treated as residuary powers with Centre.
05 — Parliament Legislating on State List — 5 Special Circumstances
| Article | Condition | Key Details |
|---|---|---|
| Art. 249 | In National Interest | Rajya Sabha passes a resolution declaring it necessary for Parliament to legislate on a State List subject in national interest. Resolution requires 2/3 of members present and voting. Law operative for 1 year (renewable). E.g., Prevention of Terrorism Act (POTA), 2002. |
| Art. 250 | During National Emergency | During NE (Art. 352), Parliament can legislate on any State List subject. Such law becomes inoperative 6 months after emergency ceases to operate. |
| Art. 252 | By Agreement of States | When two or more State Legislatures pass resolutions requesting Parliament to legislate on a State List subject. Law applicable only to those states that consented. Other states can adopt it later. E.g., Prize Competition Act, 1955; Wildlife Protection Act, 1972. |
| Art. 253 | To Implement International Treaties | Parliament can legislate on any subject (including State List) to implement international treaties, agreements, or conventions. E.g., Environment Protection Act, 1986 (implemented Stockholm Conference); COMPAT to implement WTO agreements. |
| Art. 356 | Under President’s Rule | During President’s Rule, Parliament can make laws on any subject in the State List for that state. Such law continues to be operative even after President’s Rule ends. Can be repealed, altered, or re-enacted by the State Legislature later. |
Art. 249 vs Art. 252 — Key Distinction
Art. 249 — Rajya Sabha initiative; applicable to all states; requires 2/3 majority of RS members present and voting; operative for 1 year renewable. Art. 252 — State initiative (2+ states request); applicable only to requesting states; no time limit specified. Under Art. 249, Parliament acts in national interest (top-down). Under Art. 252, states voluntarily surrender power (bottom-up).
06 — Article 254 — Repugnancy in Concurrent List
- If a State law on a Concurrent List subject is repugnant (inconsistent) to a Central law on the same subject: Central law prevails; State law is void to the extent of repugnancy
- Exception: If the State law was made with the previous assent of the President, the State law prevails in that state — until Parliament legislates on the same matter
- If Parliament later legislates on the same matter: Parliament’s law prevails; State law becomes void
- The doctrine of repugnancy applies only in the Concurrent List — not in the Union List (Parliament is supreme there) or State List (State is supreme there)
Example — Art. 254 in Practice
Tamil Nadu’s NEET exemption bill — passed by State Legislature and reserved for Presidential assent (Art. 200). This illustrates how states can seek Presidential assent to override Central law on Concurrent List subjects. The President withheld assent, demonstrating Centre’s oversight.
07 — Centre’s Control Over State Legislation
| Article | Provision |
|---|---|
| Art. 200 | Governor may reserve certain types of bills passed by State Legislature for consideration of the President. President may assent or withhold assent. Key types: bills affecting High Court jurisdiction, bills involving public interest, bills against national interest. |
| Art. 201 | When bill is reserved by Governor: President may give or withhold assent, or direct Governor to return for reconsideration. If state legislature passes the bill again, it must be sent to President again — President not bound to give assent. |
| Art. 304 | Prior approval of the President required for State bills that impose restrictions on freedom of trade and commerce within a State (bills restricting inter-State trade). |
| Art. 360 | During Financial Emergency, President can direct states to reserve Money Bills and Financial Bills for his consideration. |
| SC Ruling (2025) | Supreme Court (CJI B.R. Gavai, 2025) ruled Governor has only 3 options under Art. 200 — assent, reserve for President, or return. Cannot indefinitely withhold assent. Governor’s function under Art. 200 is not justiciable. |
08 — Administrative Relations (Articles 256–263)
Overview
Centre imposes certain restrictions on state executive power to give Centre control in executive/administrative matters. Executive power of every state is to be exercised in such a way that it complies with Union laws (Art. 256) and does not impede/prejudice the Union’s executive power (Art. 257).
| Article | Provision |
|---|---|
| Art. 256 | Executive power of State must be exercised to ensure compliance with laws made by Parliament and any existing laws applicable in the state. Centre can give directions to State to this effect. If not complied → Art. 365 → President’s Rule. |
| Art. 257 | Executive power of State must not impede or prejudice the exercise of the executive power of the Centre. Centre can give directions for construction & maintenance of means of communication declared to be of national/military importance and protection of railways. Examples of Centre’s directions: construction of roads of national importance; protection of railways; protection of border areas. |
| Art. 257A | Centre can deploy armed forces or other forces in any state in aid of the civil power (repealed by 44th Amendment, 1978) |
| Art. 258(1) | Centre can, with consent of State Government, entrust executive functions of the Centre to the State/its officers (delegation of Central executive function to State) |
| Art. 258(2) | Parliament, without consent of State, can confer functions upon State officers/State Government in matters of the Union (Note: State Legislature cannot do this) |
| Art. 258A | State Government, with consent of Central Government, can entrust executive functions of State to the Centre/its officers (delegation of State executive function to Centre — Governor initiates) |
| Art. 261 | Full faith and credit to public acts, records, and judicial proceedings of the Centre and every State throughout India |
| Art. 262 | Parliament may by law provide for adjudication of disputes relating to waters of inter-State rivers or river valleys. Parliament may also declare that the SC shall have no jurisdiction in respect of such disputes. E.g., River Water Disputes Act, 1956; Cauvery River dispute. |
| Art. 263 | President may establish an Inter-State Council to inquire into and advise on disputes between States, or matters of common interest between Centre and States. Inter-State Council constituted in 1990. |
| Art. 355 | It shall be the duty of the Union to protect every State against external aggression and internal disturbance and to ensure that the government of every State is carried on in accordance with the Constitution. Art. 355 is the basis for invoking Art. 356; also used to deploy central forces in States. |
| Art. 365 | If a State fails to comply with directions given by the Centre under Arts. 256/257, it shall be lawful for President to hold that the government of the State cannot be carried on in accordance with the Constitution — triggering President’s Rule (Art. 356). |
| Governor (Art. 153–157) |
Governor is appointed by the President by warrant under hand and seal. Holds office during the pleasure of the President — can be removed anytime by President. Acts as the constitutional link between Centre and State. Also the Chancellor of State Universities and key role in Art. 356 report. |
| State Public Service Commission |
Chairman and members of State PSC are appointed by the Governor. However, they can be removed only by the President (not the Governor) — ensuring their independence from State Government pressure. This is an important check on state executive power. |
| State Election Commissioner |
Appointed by the Governor. Can be removed only by the President in the same manner as a HC judge is removed — ensuring independence of State Election Commission from state political pressures. |
Mutual Delegation of Executive Functions
Art. 258(1) — Centre → State
President, with consent of State Government, may entrust Central executive functions to State or its officers.
Art. 258(2) — Centre → State (Without Consent)
Parliament can confer powers/impose duties on State officers without State’s consent (on matters in Union List). State Legislature cannot do the same.
Art. 258A — State → Centre
Governor, with consent of Central Government, may entrust State executive functions to the Centre or its officers.
Purpose of Mutual Delegation
Constitution provides for inter-governmental delegation of executive function to mitigate rigidity and avoid a situation of deadlock — e.g., when a State lacks resources or capacity to implement a Central program, or when the Centre needs State machinery to implement Union schemes.
09 — All India Services (Art. 312) & Administrative Coordination
All India Services — Joint Control
AIS members serve the Union and the States. They are jointly controlled by the Centre and the State, but with a clear division:
Central Government — Ultimate Control
- Power of appointment
- Taking disciplinary action
- Promotion and training
- Final say in service matters
State Government — Immediate Control
- Power to suspend (temporarily)
- Day-to-day work assignment
- Initial departmental action
Article 312 — Creation of New AIS
- Constitution authorises Parliament to create new All India Services
- Requires a Rajya Sabha resolution declaring it necessary in national interest
- Resolution must be passed by majority of not less than 2/3 of members present and voting
- Current AIS: IAS, IPS, IFoS (Indian Forest Service created in 1966)
- Proposed new AIS: Indian Legal Service, Indian Medical Service — not yet created
Inter-State Council (Art. 263)
Established in 1990 by Presidential Order. PM is the Chairman; CMs of all states and UTs (with legislatures) are members; 6 Union Cabinet Ministers as members. Functions: inquire into disputes between states, advise on matters of common interest. Meetings have been irregular — a major criticism. Recent: Inter-State Council Secretariat revitalized; meeting held in 2022 after 10 years gap.
10 — Zonal Councils & Inter-State River Water Disputes
Zonal Councils (Statutory — States Reorganisation Act, 1956)
| Zone | States Included | Key Features |
|---|---|---|
| Northern | Haryana, HP, J&K, Punjab, Rajasthan, UT of Delhi, UT of Chandigarh |
|
| Central | Chhattisgarh, UP, Uttarakhand, MP | |
| Eastern | Bihar, Jharkhand, Odisha, West Bengal | |
| Western | Goa, Gujarat, Maharashtra, UT of Dadra & NH, UT of Daman & Diu | |
| Southern | AP, Karnataka, Kerala, Tamil Nadu, Telangana, UT of Puducherry |
Inter-State River Water Disputes (Art. 262)
- Parliament enacted the Inter-State River Water Disputes Act, 1956
- Central Government can set up a Water Disputes Tribunal on the complaint of a state government
- Award of the Tribunal is final and binding on the parties
- Parliament can declare that the Supreme Court shall have no jurisdiction in such disputes
- Major disputes: Cauvery (Tamil Nadu-Karnataka-Kerala), Krishna, Mahanadi (Odisha-Chhattisgarh), Ravi-Beas (Punjab-Haryana)
11 — Financial Relations (Articles 268–293, Part XII)
Overview — Taxing Powers
The Constitution makes a threefold distribution of taxing powers: (1) Taxes exclusively levied and collected by Union; (2) Taxes levied and collected by Union but assigned/shared with States; (3) Taxes levied and collected by States. The distribution is governed by Part XII (Arts. 268–293) and the Finance Commission.
| # | Article | Category | Full Provision, Examples & Notes | Who Gets Revenue? |
|---|---|---|---|---|
| 1 | Art. 268 | Levied by Union Collected & Appropriated by States |
Examples: Stamp duties on bills of exchange, cheques, promissory notes, bills of lading, letters of credit, insurance policies, transfer of shares, debentures, proxies, receipts. Note 1: Do NOT form part of the Consolidated Fund of India — go directly to States. Note 2: In case of Union Territories, this duty is collected by the Union (not State, since UTs have no separate government in most cases). Why this arrangement? The underlying transaction happens within a State — so State collects the revenue. But since Stamp Duty is a Union List subject (Entry 91), Parliament legislates on it. |
States (collect and appropriate entirely) |
| 2 | Art. 269 | Levied & Collected by Union Assigned to States |
Examples: (a) Succession duty in respect of property other than agricultural land (b) Estate duty in respect of property other than agricultural land (c) Terminal taxes on goods or passengers carried by railways, sea or air (d) Taxes on railway fares and freights (e) Taxes on transactions in Stock Exchanges and futures markets (f) Sale/purchase of newspapers and advertisements therein (g) Sale/purchase of goods in inter-state trade (pre-GST) Note: These are assigned to the states within which they are levied. Do NOT go to Centre. |
States (within which levied) |
| 3 | Art. 269A | GST on Inter-State Trade (Added by 101st Amendment, 2016) |
Goods and Services Tax (GST) on inter-state trade or commerce is levied and collected by the Government of India (as Integrated GST / IGST). Revenue is apportioned between Union and States as provided by Parliament — based on the destination principle (where goods/services are consumed). Note: Amount apportioned to States shall NOT form part of the Consolidated Fund of India. Example: IGST collected on a transaction where goods move from Maharashtra to Tamil Nadu — revenue credited to the destination state (Tamil Nadu). |
Shared — Centre + Destination State |
| 4 | Art. 270 | Levied & Collected by Union Distributed between Union and States (Divisible Pool) |
All taxes and duties referred to in the Union List — except those in Arts. 268, 269, 269A; and except Surcharge (Art. 271) and Cess levied for specific purposes — form the Divisible Pool. Major taxes in divisible pool: Income Tax (excluding surcharge), Corporation Tax (excluding surcharge), Customs Duty, Central GST (CGST), Central Excise (residual). Distribution based on Finance Commission’s recommendations — both vertical devolution (Centre:States split) and horizontal devolution (distribution among States). Current share of States: 41% (15th and 16th Finance Commission, 2021–31). Note: The actual effective share is lower (~32%) because surcharges and cesses (not shared) have grown — a major friction point. |
Shared — 41% to States, 59% to Centre (Divisible Pool) |
| 5 | Art. 271 | Surcharge on Certain Taxes (Centre Exclusively) |
Parliament is authorised to levy a surcharge on the taxes mentioned in Arts. 269 and 270. Proceeds of such surcharges go exclusively to the Centre — NOT shareable with States. Examples: Health and Education Cess (4% on income tax/corporation tax), Clean Environment Cess (on coal), Pradhan Mantri Garib Kalyan Cess, Swachh Bharat Cess — none of these are shared with States. Consequence: As Centre levies more cesses and surcharges, the divisible pool shrinks — States receive less. Cesses grew from ~3% of gross tax revenue (2011–12) to over 20% in recent years. This is the biggest fiscal grievance of States. Note: These charges are NOT shareable with States. |
Centre exclusively (100%) |
| 6 | State Taxes (State List) |
Levied, Collected & Retained by States |
Taxes enumerated in the State List (Entries 45–63 of List II, 7th Schedule): Examples:
|
States (entirely) |
| 7 | Art. 274 | Prior Sanction of President for Certain Bills |
No Bill or amendment can be introduced or moved in either House of Parliament without prior Presidential recommendation, if it: (a) Imposes or varies any tax in which States are interested (e.g., an Income Tax amendment that changes State share) (b) Varies the meaning of “Agricultural Income” as defined in the Indian Income-Tax Act (c) Affects the principles on which money is distributed to States under Art. 270 (d) Imposes a surcharge on State taxes for Union purposes (under Art. 271) Example: Any amendment to the Finance Commission’s formula for distributing income tax proceeds requires Presidential recommendation before being introduced in Parliament. |
— |
| 8 | Art. 275 | Statutory Grants-in-Aid to States |
Parliament makes statutory grants to those states that are in need of such funds — particularly for promotion of tribal welfare and raising the level of administration in scheduled areas. Two types: (a) General grants to states not having adequate resources (based on Finance Commission recommendation) (b) Specific grants for promotion of tribal people’s welfare or raising administrative level in scheduled areas Examples: Post-devolution revenue deficit grants; grants for panchayats and municipalities; grants for forest conservation; grants for disaster management (SDRF). Note: These are charged to the Consolidated Fund of India. Finance Commission recommends the quantum. Distinct from Art. 282 (discretionary grants). |
Needy States (especially with tribal areas) |
| 9 | Art. 279A | GST Council (Added by 101st Amendment, 2016) |
President constitutes a GST Council as a joint forum of Centre and States. Composition: Union Finance Minister (Chair) + Union MoS Finance + Finance/Taxation Ministers of all States/UTs. Voting: Centre = 1/3 weightage; States collectively = 2/3 weightage; decisions require 3/4 majority. Functions: Recommend GST rates, exemptions, threshold limits, model GST laws, place of supply rules. SC in Mohit Minerals case (2022): GST Council recommendations are NOT binding — both Parliament and State legislatures have concurrent power to legislate on GST (Art. 246A). Example: GST Council sets a 5% rate on essential medicines, 28% on luxury goods — States implement via SGST legislation. |
Advisory forum; decisions by 3/4 majority |
| 10 | Art. 280 | Finance Commission (Quasi-Judicial Body) |
Constituted by President every 5 years or earlier. Chairman + 4 members. Functions: (1) Vertical devolution — States’ share in divisible pool; (2) Horizontal devolution — distribution among States; (3) Grants-in-aid to States; (4) Augmenting State Consolidated Funds for Panchayats/Municipalities. Finance Commission history: 14th FC (Y.V. Reddy) — 42%; 15th FC (N.K. Singh) — 41%; 16th FC (Arvind Panagariya, 2026–31) — 41%. Horizontal devolution criteria (16th FC): Population 15%, Area 10%, Forest & Ecology 10%, Income Distance 42.5%, Demographic Performance 12.5%, GDP Contribution 10% (new). Note: Recommendations are advisory, not binding — but followed by convention. |
Recommends Centre-State + inter-State distribution |
| 11 | Art. 282 | Discretionary Grants (Basis for CSS) |
Both Centre and States can make grants for any public purpose, even if the subject falls outside their normal legislative competence. Example — Centrally Sponsored Schemes (CSS): PM-KISAN (income support to farmers), MGNREGA, Ayushman Bharat, PM Awas Yojana, Jal Jeevan Mission — all funded via Art. 282 discretionary grants. Issue: Over 2,000+ CSS exist; States must contribute matching grants; distorts State budget priorities; reduces fiscal autonomy. Centre uses CSS to influence State policy on subjects in the State List. Reform demand: States want CSS rationalised and converted to untied grants; matching requirement reduced. |
Both Centre and States (for any public purpose) |
| 12 | Art. 293 | Borrowing by States |
States may borrow within the territory of India upon the security of the Consolidated Fund of the State. States can also take loans from the Centre (on terms determined by Centre — often tied to conditions like fiscal discipline, reforms). States CANNOT borrow from abroad — Centre borrows on their behalf through external commercial borrowings. Condition: If a State is indebted to the Centre (has outstanding Central loans), it cannot raise a new loan without the Centre’s consent. FRBM Act: Fiscal Responsibility and Budget Management Act imposes fiscal discipline on States — deficit capped at 3% of GSDP. 16th FC also recommends ending off-budget borrowings. Example: States like Kerala, Punjab with high debt-to-GSDP ratios face restrictions on new borrowings. |
States (domestic); Centre mediates foreign borrowing |
Quick Memory Table — Tax Distribution at a Glance
| Art. | Who Levies? | Who Collects? | Who Gets Revenue? | Example |
|---|---|---|---|---|
| 268 | Union | States (UTs: Union) | States entirely | Stamp duty on bills of exchange, cheques, shares |
| 269 | Union | Union | States (where levied) | Terminal taxes on rail/sea/air; tax on railway fares |
| 269A | Union (as IGST) | Union | Shared — destination state gets state portion | IGST on inter-state sale of goods/services |
| 270 | Union | Union | Shared — 41% States + 59% Centre (divisible pool) | Income Tax, Corporation Tax, Customs, CGST |
| 271 | Union (Surcharge) | Union | Centre 100% — NOT shared | Health & Education Cess, Clean Environment Cess |
| State List | States | States | States entirely | Land revenue, SGST, vehicle tax, profession tax, entertainment tax |
Non-Tax Revenue Sources
Centre’s Non-Tax Revenue
- Post and Telegraph (profits from India Post)
- Railways (Indian Railways profits)
- Banking and Broadcasting (RBI’s surplus transfer to Government)
- Currency and Coinage (seigniorage profits)
- Central Public Sector Enterprises (dividends from ONGC, NTPC, BHEL etc.)
- Escheat and Lapse (Central) — property without legal heirs goes to Centre
- Fees, fines, licences (under Central laws)
States’ Non-Tax Revenue
- Irrigation (canal water fees, reservoir charges)
- Forests (timber, forest produce)
- Fisheries (licensing fees, fish auctions)
- State Public Sector Undertakings (dividends from SEB, KSRTC etc.)
- Escheat and Lapse (State) — unclaimed property within state
- Fees and fines under State laws
- Royalties on minerals (coal royalty — major source for Jharkhand, Chhattisgarh, Odisha)
Prelims Trap — CFI vs Not CFI
Forms part of CFI: Art. 270 divisible pool taxes, Art. 275 grants (charged to CFI), Art. 282 grants (from CFI).Does NOT form part of CFI: Art. 268 taxes (go directly to States), Art. 269A IGST portion apportioned to States.
Surcharges/Cesses (Art. 271): Go to CFI but exclusively to Centre — not shared.
12 — Finance Commission (Article 280)
| Aspect | Details |
|---|---|
| Constitutional Basis | Art. 280 — provides for Finance Commission as a quasi-judicial body |
| Constituted By | President of India every fifth year or even earlier if necessary |
| Nature | Quasi-judicial body — its recommendations are advisory, not binding, but by convention followed by the government |
| Composition | A Chairman + 4 other members, appointed by President. Hold office for period specified by President. Eligible for reappointment. |
| Qualification of Chairman | Must be a person having experience in public affairs |
| Qualification of 4 Members | Parliament determines qualifications. Must be selected from: (1) A HC judge or qualified to be one; (2) Person with specialised knowledge of finance and accounts of government; (3) Person with wide experience in financial matters and administration; (4) Person with special knowledge of economics |
| Functions (Art. 280(3)) |
|
Finance Commissions — Key Data
| FC | Chairman | Award Period | States’ Share in Divisible Pool |
|---|---|---|---|
| 13th FC | Vijay Kelkar | 2010–15 | 32% |
| 14th FC | Y.V. Reddy | 2015–20 | 42% (record increase — biggest jump) |
| 15th FC | N.K. Singh | 2021–26 | 41% (reduced from 42% due to J&K reorganisation into 2 UTs) |
| 16th FC | Arvind Panagariya | 2026–31 | 41% (retained; report submitted Nov 17, 2025) |
13 — GST & 101st Constitutional Amendment (2016)
101st Constitutional Amendment Act, 2016
Introduced the Goods and Services Tax (GST) regime in India. Came into effect 1 July 2017. A “One Nation, One Tax” system replacing a complex web of Central and State indirect taxes. Added Art. 246A, Art. 269A and amended several other articles.
GST Council (Article 279A)
- Constitution established GST Council (Art. 279A inserted by 101st Amendment)
- Chairman: Union Finance Minister
- Members: Union Minister of State for Finance + Finance/Taxation Ministers of all States/UTs
- Voting: Centre has 1/3 weightage; States collectively have 2/3 weightage
- Decisions require 3/4 majority of votes cast
- Quorum: 50% of total members
- Functions: Recommend GST rates, exemptions, place of supply rules, threshold limits, model laws
- SC in Union of India v. Mohit Minerals (2022) held: GST Council recommendations are not binding — Parliament and State Legislatures have equal, simultaneous power to legislate on GST
GST Impact on Fiscal Federalism
- States surrendered their power to levy VAT/sales tax — replaced by State GST (SGST)
- Centre levies CGST (Central GST) and IGST (Integrated GST — on inter-state trade)
- IGST revenue shared between Centre and States per Art. 269A
- Compensation Mechanism: Centre promised states compensation for 5 years (2017–22) for revenue loss; ended June 2022 — created fiscal friction
- States argue Centre’s increasing cesses and surcharges (not shareable) shrink divisible pool — from 88.6% (2011–12) to ~79% (2021–22) of gross tax revenue
14 — Issues in Centre-State Relations & Commission Recommendations
| Issue | Concern | Reform Suggested |
|---|---|---|
| Fiscal Imbalance | Vertical imbalance: Centre has more revenue but States have more expenditure responsibilities. Cesses & surcharges shrink divisible pool. GST compensation ended. States complain of being “beggars” for their own tax share. | Cap cesses and surcharges; increase vertical devolution to 50%; strengthen Finance Commission’s mandate; untied transfers |
| Governor’s Role | Governor acting as “agent of Centre” in opposition-ruled states — withholding Bills, delaying assent, destabilising governments. SC 2025 ruling curtails this. | Sarkaria Commission: Governor must be apolitical; Punchhi Commission: fixed term of 5 years for Governors; statutory guidelines for assent |
| CSS (Centrally Sponsored Schemes) | 2000+ CSS distort state priorities, impose conditions, divert state funds to Central priorities. States have to contribute matching share. | Rationalise CSS; increase untied grants; allow states to modify schemes for local needs; sunset clauses |
| Central Agencies | CBI, ED, Income Tax Dept operating in states without/against state consent — perceived as political targeting of opposition states. | CBI requires state consent (Delhi Special Police Establishment Act) — many states withdrew consent. Strengthen federal accountability. |
| Inter-State River Disputes | Cauvery, Krishna, Mahanadi, Ravi-Beas disputes unresolved for decades. Tribunal awards not implemented. | Amend Inter-State River Water Disputes Act; time-bound tribunals; parliamentary oversight of award implementation |
| Art. 356 Misuse | 134+ impositions; often used to dismiss democratically elected governments. Federalism undermined. | Bommai case guidelines; mandatory floor test; warning to state before imposition; Punchhi Commission recommendations |
| Challenging Central Laws |
States increasingly challenging Central laws in SC. Kerala filed suit to declare CAA (Citizenship Amendment Act) unconstitutional. Chhattisgarh challenged the National Investigation Agency (NIA) Act. Punjab, Rajasthan challenged farm laws. This reflects growing assertion of state legislative autonomy. | SC’s original jurisdiction under Art. 131 provides a constitutional forum for Centre-State disputes; strengthen ISC as a pre-litigation consultation forum to prevent such conflicts | Labour laws, environment — Parliament frequently legislates on Concurrent List subjects with limited state consultation, overriding state laws. | Enhanced pre-legislative consultation; Inter-State Council as forum for Concurrent List disputes; cooperative legislation mechanism |
Commission Recommendations — Sarkaria, Punchhi & NCRWC
Sarkaria Commission (Set up 1983, Report 1988)
- Cooperative federalism is necessary
- Art. 356 to be used only as last resort
- Governor should not be an active politician; 5-year non-removable tenure
- Inter-State Council should be activated regularly
- No dilution of Concurrent List or State List powers
- AIS to be retained and strengthened
Punchhi Commission (Set up 2007, Report 2008)
- Governor: fixed 5-year term; removal only with consultation of CM; role in Art. 356 to be curtailed
- Localized emergency under Art. 355 instead of full Art. 356
- Concurrent List: Centre should consult states before legislating
- New institutions for coordination: National Integration Council, reactivated ISC
- Fiscal federalism: reduce CSS conditionalities
- Scope of devolution to local bodies to be constitutionally defined through appropriate amendments
NCRWC (Set up 2000, Report 2002)
- Inter-State Trade and Commerce Commission should be established as a legislative body under Art. 307
- Emergency and disaster management should be moved to the Concurrent List of the 7th Schedule
- Safeguards in Art. 356 should be tightened; prior warning mandatory
- Governor’s report under Art. 356 should be given wide publicity in media
Other Institutional Measures
- Strengthen Inter-State Council (Art. 263), Finance Commission (Art. 280), and NITI Aayog
- Promote fiscal federalism for equitable resource distribution
- Revisit 7th Schedule — some scholars advocate a local government list
- Encourage state-level innovations — states are repositories of governance innovation
Sarkaria Commission — Additional Recommendations
- AIS should be strengthened; more such services should be created
- Union should occupy only that much field of a Concurrent subject on which uniformity of policy is needed; leave the rest for States
- ISC should be constituted and made fully functional
- Centre-State financial transfers should be more transparent and predictable
15 — Current Affairs & Recent Developments (2024–25)
16th Finance Commission · November 2025
16th FC Submits Report — Major Shift to “Compliance-Driven” Fiscal Federalism (2026–31)
- Chaired by Dr. Arvind Panagariya (former NITI Aayog Vice-Chairman). Constituted in December 2023. Report submitted to President Droupadi Murmu on 17 November 2025.
- Vertical Devolution: 41% retained (unchanged from 15th FC). States wanted 50%; industrialised states wanted more.
- New criterion — “Contribution to GDP” (10% weight): replaces erstwhile “Tax and Fiscal Effort” (2.5%). Rewards states with higher economic productivity. Shift from need-based to performance-based federalism.
- Income Distance weight reduced from 45% to 42.5%; Area reduced from 15% to 10% — tilts formula toward richer states.
- Revenue Deficit Grants discontinued — hurts hill states, NE states, structurally deficit states.
- Total Grants Recommended: ₹9.47 lakh crore (2026–31)
- Fiscal discipline: State deficits capped at 3% of GSDP; end of off-budget borrowings; rationalise subsidies; warning against unchecked unconditional cash transfers.
- Failure to curb cesses & surcharges — major criticism; divisible pool remains shrunk.
- Recommended CAG-certified disclosure of net tax proceeds under Art. 279 annually — transparency measure.
- UPSC Relevance: GS-II (Centre-State relations, fiscal federalism); GS-III (Indian economy, resource mobilisation)
SC Ruling on Governor’s Powers · 2025
SC Rules: Governor Cannot Indefinitely Withhold Assent to State Bills (Art. 200)
A Constitution Bench (CJI B.R. Gavai, 2025) ruled that Governors have only 3 options under Art. 200 — assent, reserve for President, or return the bill with a message. The first proviso restricts the third option. Governor’s function under Art. 200 is not justiciable, but indefinite pocket veto is unconstitutional. This arose from petitions by Tamil Nadu, Kerala, Punjab, and Telangana against their respective Governors. Strengthens state legislative autonomy; curbs Centre’s use of Governor as a veto mechanism.
GST Compensation · Ended June 2022
End of GST Compensation Period — Fiscal Friction Continues
The 5-year GST compensation period (2017–2022) has ended. States were promised compensation for revenue losses. During COVID, Centre borrowed ₹2.7 lakh crore to pay compensation — repaid through the Compensation Cess extended till 2026. States argue the divisible pool is shrinking (down from 88.6% to ~79% of gross tax revenue) due to rising non-shareable cesses and surcharges. Southern states (TN, Karnataka, Maharashtra) argue they contribute more but receive less — “penalised for development.” The 16th FC’s failure to curb cesses has kept this a live issue.
Inter-State Council · 2022
Inter-State Council Meeting After 10-Year Gap
The Inter-State Council (established under Art. 263) held a meeting in 2022 after a gap of nearly 10 years (last meeting was in 2016). The Council discussed Sarkaria and Punchhi Commission recommendations on Centre-State relations. ISC meetings are seen as essential for federal dialogue — their irregularity is a major criticism of India’s cooperative federalism architecture. Reactivation called for in context of Manipur crisis, GST disputes, and Governor-CM friction.
Cauvery River Dispute · Ongoing
Cauvery Water Management Authority Remains Contentious
The Cauvery Water Disputes Tribunal (1990) gave its final award in 2007. SC upheld the award in 2018. Karnataka, Tamil Nadu, Kerala, and Puducherry continue to dispute releases. The Cauvery Water Management Authority (CWMA) — a statutory body — was constituted in 2018 to implement the award. Annual allocation battles occur; SC has intervened multiple times. Illustrates limitations of Art. 262 mechanism and the need for strong inter-state cooperation.
Competitive Federalism · NITI Aayog
India’s Competitive Federalism Through NITI Aayog Rankings
NITI Aayog continues to publish state performance rankings: SDG India Index (annual), Ease of Doing Business Index, Health States Progressive India Report, School Education Quality Index. These rankings drive competitive federalism — states compete for investment, scheme implementation, and development metrics. Kerala, Tamil Nadu, and Himachal Pradesh consistently rank among top performers in social indices. Bihar, UP, and Jharkhand face challenges in most rankings.
16 — Mock Mains Questions
Q1. “Cooperative federalism in India faces structural challenges in financial relations.” Examine the major issues in fiscal federalism and discuss how institutions like the Finance Commission and GST Council attempt to address them.
Approach: Define fiscal federalism — vertical (Centre-State) and horizontal (inter-State) imbalances → Constitutional provisions: Arts. 268–280, divisible pool → Issues: (1) Rising cesses/surcharges shrinking divisible pool (88.6% → ~79%); (2) GST compensation dispute; (3) CSS conditionalities reducing untied funds; (4) State borrowing constraints; (5) Revenue deficit of states → Finance Commission: Art. 280, quasi-judicial, 16th FC 2026–31 (41%, GDP contribution criterion, ₹9.47L cr grants) → GST Council: Art. 279A, SC Mohit Minerals ruling (not binding); cooperative model → Reforms: cap cesses, increase untied grants, strengthen ISC for fiscal dialogue, review CSS.
Q2. Examine the constitutional provisions under which Parliament can legislate on subjects in the State List. How do these provisions affect the autonomy of States?
Approach: Five circumstances: Art. 249 (RS resolution, 2/3 majority, national interest, 1 year); Art. 250 (NE duration, 6-month sunset); Art. 252 (2+ states request, only for those states); Art. 253 (international treaties, no restriction); Art. 356 (President’s Rule, law survives PR) → Examples: POTA (Art. 249), WPA 1972 (Art. 252), EPA 1986 (Art. 253) → Impact on autonomy: Art. 249/250 temporary, with some safeguards; Art. 252 state-initiated so less autonomy concern; Art. 253 most expansive — courts have limited ability to challenge; Art. 356 most intrusive → Balance: necessary for national unity; Sarkaria/Punchhi recommend consultation before using Arts. 249/253 on state matters.
Q3. “The Governor has become a bone of contention in Centre-State relations.” Critically examine the role of the Governor in administrative relations between Centre and States.
Approach: Constitutional role: Art. 153 (appointment), Art. 154 (executive head of state), Art. 200 (assent to bills), Art. 356 (report for President’s Rule), Art. 163 (acting on CM’s advice vs discretion) → Controversy: Governor as “agent of Centre” — withholding Bills (TN NEET bill, Kerala fiscal bills, WB bills), inviting smaller party to form government (Karnataka 2018, Goa 2017), dismissing governments arbitrarily → SC cases: Shamsher Singh (1974), Bommai (1994), SC 2025 (Art. 200 ruling) → Sarkaria: Governor not to be active politician; 5-year tenure; consult CM before Art. 356 → Punchhi: remove Governor’s immunity for Art. 356 actions; fixed 5-year term → Reforms: codify discretionary powers; statutory guidelines for assent; selection by collegium including PM + CM + Speaker.
Q4. Differentiate between the Union List, State List, and Concurrent List. What happens in case of conflict between Union and State laws on the Concurrent List? (Art. 254)
Approach: Three lists: Union (100 subjects, Parliament exclusive), State (61 subjects, State exclusive, but Parliament can legislate under 5 circumstances), Concurrent (52 subjects, both can legislate) → Residuary with Union (Art. 248) — unlike USA/Australia/Switzerland where with States → Conflict in Concurrent List — Art. 254: Union law prevails to extent of repugnancy; State law void → Exception: if State law received Presidential assent before Union law, State law prevails in that State — but if Parliament legislates on same matter later, Parliament prevails → Example: Education moved to Concurrent List by 42nd Amendment (1976) — earlier in State List → NEET controversy: Tamil Nadu’s exemption bill — Art. 254 dynamics in practice.
Q5. “The recommendations of the 16th Finance Commission represent a paradigm shift from need-based to performance-based fiscal federalism.” Critically examine this statement.
Approach: Context: 16th FC (Arvind Panagariya), submitted Nov 2025, covers 2026–31 → Key recommendations: 41% vertical share retained; new “Contribution to GDP” criterion (10% weight replacing Tax Effort 2.5%); income distance reduced 45%→42.5%; area 15%→10%; revenue deficit grants discontinued; total grants ₹9.47L cr; fiscal discipline (3% GSDP cap, no off-budget borrowings) → Paradigm shift: from “gap-filling” approach to performance incentives; rewards industrialised states; competitive federalism element → Criticism: (1) Rewards rich states — widens regional disparities; (2) Hill/NE/structurally deficit states hurt by RDG removal; (3) Cesses/surcharges still uncurbed — divisible pool still shrunk; (4) Reduced untied grants → Support: reduces moral hazard; incentivises growth; fiscal discipline necessary → Conclusion: Hybrid model needed — performance + need criteria; dialogue through ISC; ensure poorest states not left behind.
Q6. Examine how the Goods and Services Tax (GST) has reshaped fiscal federalism in India. Has it strengthened or weakened state financial autonomy?
Approach: Pre-GST: States had power to levy VAT/CST/entry tax — fiscal autonomy → 101st Amendment 2016: Art. 246A, 269A, GST Council (279A) → Structure: CGST, SGST, IGST — destination-based → Benefits to states: predictable revenue; end of cascading taxes; destination principle benefits consuming (often poorer) states → Weakening state autonomy: (1) States surrendered indirect tax power; (2) GST Council — recommendations not binding but states follow; (3) Compensation dispute (2022 end); (4) IGST pool division — Centre’s discretion → SC Mohit Minerals (2022): GST Council recommendations not binding; both Centre and States have concurrent power → Way forward: expand GST base; permanently merge compensation cess; strengthen GST Council as fiscal council; index compensation to inflation; more state control over rate-setting in non-essential goods.
