Centre-State Relations
Centre-State Relations
Centre-State relations in India are governed by Part XI (Art 245-263) and Part XII (Art 264-300A) of the Constitution. India follows a federal structure with a strong unitary bias — described by K.C. Wheare as "quasi-federal." Legislative, administrative, and financial relations between the Centre and States are distributed through three lists in the Seventh Schedule. The balance between central authority and state autonomy is a dynamic and evolving feature of Indian governance.
Key Dates
Constitution came into force with three lists in Seventh Schedule: Union List (97 subjects), State List (66 subjects), Concurrent List (47 subjects)
States Reorganisation Act — linguistic reorganization created new Centre-State dynamics; 14 states and 6 UTs formed
Rajamannar Committee (appointed by Tamil Nadu government) — recommended wider state autonomy, devolution of powers, and reduction of central overreach
Article 249 first used — Rajya Sabha empowered Parliament to legislate on State List subjects in national interest (regarding maintenance of internal security)
42nd Amendment — transferred 5 subjects from State List to Concurrent List (education, forests, weights and measures, protection of wild animals and birds, administration of justice)
Sarkaria Commission appointed by Indira Gandhi government to review Centre-State relations comprehensively
Sarkaria Commission report submitted — 247 recommendations including: Art 356 as last resort, ISC activation, Governor from outside state
Inter-State Council constituted under Art 263 based on Sarkaria Commission recommendation; PM as Chairman
Three new states created (Jharkhand, Chhattisgarh, Uttarakhand) — redrew Centre-State fiscal and administrative relationships
Punchhi Commission on Centre-State Relations appointed; submitted report in 2010 with recommendations on Governor, emergency provisions, and fiscal federalism
NITI Aayog replaced Planning Commission — shift from centralized planning to cooperative and competitive federalism
GST (101st Amendment) implemented — transformed fiscal federalism; GST Council (Art 279A) became India's most important federal institution
Legislative Relations — Distribution of Powers (Art 245-246)
The distribution of legislative powers is the foundation of India's federal structure. Article 245: Parliament may make laws for the whole or any part of India; a state legislature may make laws for the whole or any part of the state. The power is "subject to the provisions of this Constitution" — meaning legislative competence must conform to the Seventh Schedule distribution and other constitutional limits. Article 246: distributes legislative competence through three lists in the Seventh Schedule. Union List (List I) — currently 100 subjects (originally 97, expanded by 42nd and subsequent amendments). Only Parliament can legislate on Union List subjects. Includes: defence, armed forces, atomic energy, foreign affairs, war and peace, citizenship, railways, ports, airways, posts and telegraphs, banking, currency and coinage, foreign exchange, insurance, stock exchanges, inter-state trade and commerce, census, All India Services, elections, audit (CAG), Supreme Court, etc. State List (List II) — currently 61 subjects (originally 66, reduced by 42nd Amendment which transferred 5 subjects to Concurrent List). Only state legislatures can legislate on State List subjects (normally). Includes: public order, police, prisons, local government, public health, agriculture, land, fisheries, state taxes (land revenue, excise on alcohol, stamp duty), water supply, burial grounds, markets and fairs, etc. Concurrent List (List III) — currently 52 subjects (originally 47). Both Parliament and state legislatures can legislate, but in case of conflict, the central law prevails (Art 254). Includes: criminal law and procedure, marriage and divorce, bankruptcy and insolvency, trusts, civil procedure, contempt of court, adulteration of foodstuffs, drugs and poisons, economic and social planning, trade unions, labour welfare, education, forests, weights and measures, price control, electricity, newspapers/books/printing presses, etc.
Residuary Powers and Parliamentary Supremacy
Article 248 provides that Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List — this is the residuary power. Entry 97 of the Union List explicitly grants Parliament jurisdiction over "any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists." This is a significant centralizing feature — in the US and Australia, residuary powers lie with the states, while in Canada (like India), they lie with the Centre. The centralizing tilt extends further through several provisions: (1) Art 249: if the Rajya Sabha passes a resolution by 2/3 majority that it is necessary or expedient in the national interest for Parliament to legislate on any State List matter, Parliament can do so for 1 year (renewable); (2) Art 250: during a Proclamation of Emergency (Art 352), Parliament can legislate on any State List subject; (3) Art 252: if two or more state legislatures pass resolutions requesting Parliament to legislate on a State List matter, Parliament can do so for those states (and other states can adopt it later); (4) Art 253: Parliament can legislate on any subject (including State List) to implement international treaties, agreements, or conventions; (5) Art 356: during President's Rule, Parliament exercises the state legislature's powers. In case of repugnancy between central and state laws on Concurrent List subjects (Art 254), the central law prevails. However, a state law can override the central law if: it was reserved for and received Presidential assent (Art 254(2)). The doctrine of "pith and substance" determines legislative competence when a law appears to encroach on another list — the true nature of the legislation determines which list it falls under.
Administrative Relations (Art 256-263)
Administrative relations ensure coordination between Union and state executives. Article 256: the executive power of every state shall be so exercised as to ensure compliance with laws made by Parliament and any existing law applicable to that state; the Union executive can give directions to the state for this purpose. Article 257(1): state executive power shall not impede or prejudice the exercise of the Union executive power; the Centre can give directions regarding: (a) construction and maintenance of means of communication of national or military importance (Art 257(2)), (b) measures for protection of railways within the state (Art 257(3)). Article 257(4): if a state fails to comply, the Centre can charge the cost to the state. Article 258: the President can, with the consent of the state government, entrust to that government or its officers functions relating to any matter falling within the Union executive (delegation downward). Article 258A (added by 7th Amendment, 1956): the Governor can, with the consent of the Union government, entrust Union officers with functions relating to state matters (delegation upward). Article 260: the Union can exercise functions relating to a territory not part of India if so agreed. Article 261: full faith and credit to public acts, records, and judicial proceedings of the Union and all states. Article 262: Parliament can provide for adjudication of inter-state water disputes (details covered under inter-state relations). Article 263: the President can establish an Inter-State Council for investigating disputes, discussing common interests, and coordinating policy. These provisions create a framework of cooperative executive relationships with clear Union supremacy in case of conflict.
Financial Relations — Tax Distribution (Art 268-270)
Financial relations determine fiscal federalism — the sharing of revenue resources between Centre and States. Article 268: duties levied by the Union but collected and appropriated by the States — stamp duties on bills of exchange, cheques, promissory notes, transfer of shares, insurance policies (excluding medicinal/toilet preparations which are covered under Art 268A, now omitted after GST). Article 269: taxes levied and collected by the Union but assigned to the States — this originally covered Central Sales Tax (CST) on inter-state trade, now largely subsumed by IGST under GST. Article 269A (added by 101st Amendment): IGST (Integrated GST) on inter-state supplies — levied and collected by the Centre but apportioned between Centre and States as recommended by the GST Council. Article 270: taxes levied and collected by the Union but distributed between the Union and the States — this is the MAIN provision for vertical devolution. All taxes and duties referred to in the Union List (except those under Art 268, 269, surcharges, and cesses) are shared between Centre and States based on the Finance Commission's recommendations. The share of states has progressively increased: 32% (13th FC, 2010-15) → 42% (14th FC, 2015-20) → 41% (15th FC, 2020-25, reduced due to newly formed UTs of J&K and Ladakh). Cesses and surcharges are NOT shareable with states (they go entirely to the Centre) — this has been a major point of contention, with states alleging that the Centre is increasing cesses/surcharges to avoid sharing revenue.
Financial Relations — Grants and Borrowing (Art 275-293)
Article 275: grants-in-aid from the Consolidated Fund of India to states — Parliament may provide grants to states as recommended by the Finance Commission. Special grants are given to states for tribal welfare and to meet costs of administration of scheduled areas. Article 282: both the Union and states can make grants for "any public purpose" — this is the basis for Centrally Sponsored Schemes (CSS), which have been criticized for bypassing the Finance Commission framework and reducing state flexibility. States have demanded that CSS funds be untied and states given greater autonomy in implementation. Article 280: the Finance Commission is constituted every 5 years by the President (currently the 16th FC under Arvindrajulu Reddy). It recommends: (a) distribution of net proceeds of taxes between Centre and States (vertical devolution), (b) allocation among states (horizontal devolution — based on criteria like population, income distance, area, forest cover, demographic performance, tax effort), (c) grants-in-aid under Art 275, (d) measures needed to augment state revenues. The Finance Commission is the constitutional fulcrum of fiscal federalism. Article 292: the Union can borrow on the Consolidated Fund of India (no limit specified). Article 293: state borrowing — a state can borrow within India on the security of the Consolidated Fund of the State; if a state has outstanding loans from the Centre, it cannot borrow without Centre's consent. This gives the Centre significant leverage over state borrowing decisions. FRBM Act, 2003 sets fiscal deficit targets (3% of GDP for both Centre and States).
GST and the GST Council — Cooperative Fiscal Federalism
The 101st Constitutional Amendment (2016) introduced the Goods and Services Tax (GST) — the most transformative reform of Centre-State fiscal relations since Independence. GST subsumed 17 indirect taxes (including Central Excise, Service Tax, VAT, CST, entry tax, luxury tax, entertainment tax, etc.) into a unified tax framework. Article 246A (new): gives both Parliament and state legislatures concurrent power to make laws with respect to GST — a unique provision as it covers both Union and State subjects. Article 269A: deals with IGST on inter-state supplies. Article 279A: establishes the GST Council as a constitutional body. Composition: Union Finance Minister (Chairman) + Union Minister of State for Finance + Finance Ministers of all States and UTs with legislatures. Voting: Centre has 1/3 of the total votes; all states together have 2/3. Decisions by 3/4 majority of weighted votes. This gives states a veto — no decision can be taken without substantial state support, and the Centre alone cannot push through decisions. The GST Council recommends: tax rates, exemptions, threshold limits, model GST laws, special provisions for certain states, settlement of disputes, and any matter related to GST. In Union of India v. Mohit Minerals (2022), the SC held that GST Council recommendations are NOT binding on Parliament or state legislatures — they are "persuasive" and intended to foster cooperative federalism. However, in practice, all states have followed GST Council decisions. Compensation issue: the Centre guaranteed 14% annual revenue growth to states for 5 years (2017-2022) from a GST Compensation Cess — compensation ended in 2022, raising state concerns about revenue adequacy.
Sarkaria Commission (1983-88) — Key Recommendations
The Sarkaria Commission on Centre-State Relations was appointed in June 1983 under the chairmanship of Justice R.S. Sarkaria (retired SC judge). It submitted its 1,600-page report in October 1988 with 247 recommendations covering legislative, administrative, financial, and institutional aspects. Key recommendations: (1) Article 356 (President's Rule) should be used only as a LAST RESORT — the state assembly should not be dissolved unless the Parliament approves the proclamation; (2) the Governor should be an eminent person from OUTSIDE the state, not belonging to the ruling party at the Centre, and not a politician (especially one who has recently contested elections); (3) the Governor should be given a fixed 5-year tenure and removed only through impeachment; (4) the Rajya Sabha should have an effective role in federal relations; (5) the Inter-State Council under Art 263 should be constituted and activated (implemented in 1990); (6) residuary powers of taxation should remain with Parliament; (7) All India Services should be strengthened, not weakened; (8) Centre should consult states before legislating on Concurrent List subjects; (9) the National Development Council should be reconstituted; (10) Zonal Councils should be revitalized; (11) fiscal transfers should be based on objective criteria. The Commission rejected demands for transferring subjects from the Union/Concurrent List to the State List. While many recommendations have been implemented (especially the ISC), others remain unfulfilled — Governor's appointment standards continue to be violated in practice.
Punchhi Commission (2007-10) — Key Recommendations
The Punchhi Commission on Centre-State Relations was appointed in April 2007 under Justice Madan Mohan Punchhi (former CJI). It submitted its report in seven volumes in March 2010. Key recommendations: (1) Governor should be given a FIXED tenure of 5 years and should be removable only by a process similar to that of a Supreme Court judge (impeachment-like); (2) the Governor should not belong to the ruling party at the Centre or to the state where appointed; (3) Article 355 (Centre's duty to protect states from internal disturbance) should be amended to enable the Centre to deploy forces in a state without the state's consent in case of localized emergencies — localized emergencies should not lead to state-wide President's Rule; (4) Article 356 should be used only as a last resort after the President explores all alternatives under Art 355; (5) a warning should be given to the errant state before imposing President's Rule; (6) concurrent jurisdiction should be used more carefully; (7) a Central Law on public order to deal with communal disturbances; (8) the Inter-State Council should be strengthened with a permanent secretariat; (9) Finance Commission should follow objective criteria for fiscal transfers; (10) local bodies (Panchayati Raj institutions and municipalities) should be adequately empowered and funded. The Punchhi Commission also recommended that the Union should not use the office of the Governor as a political instrument. Its recommendations on Governor's role and emergency provisions are particularly significant.
Cooperative and Competitive Federalism
India's federal model has evolved through distinct phases. Phase 1 (1950s-1960s): "Cooperative federalism" under Nehru — Centre and states collaborated through the Planning Commission, National Development Council, and Five-Year Plans. Phase 2 (1970s-1990s): rising Centre-State tensions — misuse of Art 356, Governor's office as political tool, demand for greater state autonomy (Rajamannar Committee, Anandpur Sahib Resolution). Phase 3 (1990s-2010s): coalition politics empowered states; decentralization through 73rd-74th Amendments (Panchayati Raj and municipalities); landmark decisions like S.R. Bommai (1994) curbed Art 356 misuse. Phase 4 (2015-present): "cooperative AND competitive federalism" — NITI Aayog (established 2015, replacing Planning Commission) promotes inter-state competition on governance indicators. The GST Council is the most successful model of cooperative federalism — Centre and states jointly decide tax rates through weighted voting. Competitive federalism: states compete to attract investment (Ease of Doing Business rankings), improve governance outcomes, and implement central schemes efficiently. However, tensions persist: (a) states demand more untied fiscal transfers (CSS reduce flexibility); (b) Governor appointments continue to be politicized; (c) the Centre's use of cesses and surcharges (not shareable) reduces the effective share of states; (d) centrally-imposed lockdowns during COVID-19 raised federalism concerns; (e) the abolition of the Planning Commission removed a key Centre-State consultative platform.
Special Provisions and Asymmetric Federalism
India practices "asymmetric federalism" — some states and regions have special constitutional provisions. Article 370 (now abrogated by Presidential Order, 2019, upheld by SC in 2023): granted special status to Jammu and Kashmir — own Constitution, separate flag, limited applicability of Union laws (required Presidential Order). After abrogation, J&K became a Union Territory with legislature, and Ladakh a UT without legislature. Article 371 and 371A-J: special provisions for specific states. Art 371A (Nagaland): Parliament cannot impose laws on religious/social practices, customary law, land ownership, and local governance without state assembly consent. Art 371B (Assam): committee of tribal MLAs for tribal area matters. Art 371C (Manipur): similar hill areas committee. Art 371D-E (Andhra Pradesh): special provisions for regional employment and education. Art 371F (Sikkim): protects old laws, seats reserved for various communities. Art 371G (Mizoram): similar to Nagaland provisions. Art 371H (Arunachal Pradesh): Governor has special responsibility for law and order. Art 371I (Goa): special provisions for local governance. Art 371J (Hyderabad-Karnataka region): separate development board, employment/education reservations. Fifth Schedule: administration of Scheduled Areas (tribal areas) in 10 states — Governor has special powers; Tribes Advisory Council. Sixth Schedule: autonomous district and regional councils in Assam, Meghalaya, Tripura, and Mizoram — legislative, judicial, and executive powers on tribal matters.
Role of Governor in Centre-State Relations
The Governor is the crucial link between the Centre and the state, and the most contentious element of Centre-State relations. Constitutional provisions: the Governor is appointed by the President (Art 155) — in practice, by the Central government. The Governor holds office "during the pleasure of the President" (Art 156) — can be removed at any time without cause. Discretionary powers: the Governor has certain discretionary powers that create friction — reserving state bills for Presidential consideration (Art 200), reporting on the breakdown of constitutional machinery (basis for Art 356), and exercise of discretion in appointment of CM when no party has a clear majority. The Sarkaria Commission recommended: Governor should be an eminent person from outside the state, not a politician, and should serve a fixed 5-year term. The SC in B.P. Singhal v. Union of India (2010) held that: (a) the Governor can be removed at any time without cause, (b) but reasons for removal should exist and are subject to judicial review to check if the removal was arbitrary. In Nabam Rebia v. Deputy Speaker (2016), the SC held that the Governor cannot exercise discretion in a manner that undermines the democratic process. Key controversies: Governors have been accused of acting as agents of the Central government — delaying assent to state bills (Kerala, Tamil Nadu), recommending President's Rule for political reasons, and influencing government formation in hung assemblies. The Punchhi Commission recommended that the Governor should be removable only through impeachment-like process, but this has not been implemented.
Inter-Governmental Bodies and Institutions
Several constitutional and statutory bodies facilitate Centre-State and inter-state relations. Inter-State Council (Art 263): established in 1990 on Sarkaria Commission recommendation. PM is Chairman; CMs of all states, CMs of UTs with legislatures, administrators of UTs, and 6 Union Ministers are members. Investigates disputes, discusses common interests, and coordinates policy. Meets at PM's discretion; recommendations are advisory. Reconstituted in 2021 with a Standing Committee of 15 members. NITI Aayog (established 2015): replaced the Planning Commission (1950-2014). PM is Chairperson; CMs and LG of UTs are members of the Governing Council. Promotes cooperative and competitive federalism through policy advocacy, data-driven governance, and state performance monitoring. Unlike the Planning Commission, NITI Aayog does not allocate funds to states. National Development Council (NDC): chaired by PM; includes all CMs and Planning Commission members. Last met in 2012; effectively defunct after NITI Aayog replaced Planning Commission. Finance Commission (Art 280): constitutional body; recommends tax devolution formula. Currently 16th FC. Zonal Councils: 5 statutory bodies under States Reorganisation Act 1956 — Northern (8 states + 2 UTs), Central (4 states), Eastern (4 states), Western (3 states + 2 UTs), Southern (5 states + 1 UT). Chaired by Union Home Minister. Discuss border disputes, linguistic minorities, economic planning, transport. North Eastern Council (NEC, 1972): 8 NE states (including Sikkim from 2002).
Five Circumstances When Parliament Legislates on State List
The Constitution provides five exceptional circumstances under which Parliament can legislate on State List subjects, significantly tilting the balance toward the Centre. These are among the most tested provisions in competitive exams. (1) Article 249 — National Interest Resolution: When the Rajya Sabha passes a resolution by NOT LESS THAN 2/3 of members present and voting that it is necessary or expedient in the national interest for Parliament to make laws on any State List matter, Parliament gets that power for 1 year (renewable by fresh resolutions). This was first used in 1952 regarding the maintenance of supplies essential to the community. (2) Article 250 — During National Emergency: When a Proclamation of Emergency under Art 352 is in operation, Parliament can make laws on ANY matter in the State List. Such laws remain in effect for 6 months after the Emergency ceases. This is the broadest inroad into state legislative autonomy. (3) Article 252 — By Agreement of States: If the legislatures of TWO or more states pass resolutions requesting Parliament to legislate on a State List matter, Parliament can do so for those consenting states. Any other state can adopt such legislation later by resolution. Cannot be repealed by state legislatures — only Parliament can amend or repeal it. Used for: Prize Competitions Act 1955, Wild Life (Protection) Act 1972, Water (Prevention and Control of Pollution) Act 1974, Urban Land (Ceiling & Regulation) Act 1976. (4) Article 253 — International Treaties: Parliament has exclusive power to make any law for implementing any treaty, international agreement, or convention, even if the subject falls in the State List. This is a sweeping provision — no subject is beyond Parliament's reach if there is an international obligation. Used extensively for environmental legislation. (5) Article 356 — President's Rule: During President's Rule, Parliament exercises the legislative power of the state legislature on all subjects including the State List.
Seventh Schedule — Detailed Analysis of Key Entries
The Seventh Schedule is the backbone of India's legislative federalism. Union List (List I) — currently 100 entries. Key entries include: Entry 1 (defence), Entry 2 (naval/military/air forces), Entry 3 (delimitation of cantonment areas), Entry 7 (industries for defence), Entry 9 (preventive detention for defence/foreign affairs/security of India), Entry 10 (foreign affairs), Entry 14 (entering into treaties), Entry 21-22 (shipping/navigation/airways), Entry 24-25 (shipping/fishing beyond territorial waters), Entry 36 (currency/coinage/legal tender), Entry 37 (foreign exchange), Entry 38 (RBI), Entry 41 (trade/commerce with foreign countries), Entry 42 (inter-state trade/commerce), Entry 44 (incorporation/regulation of corporations), Entry 45 (banking), Entry 47 (insurance), Entry 52 (industries under Union control — IDR Act), Entry 54 (regulation of mines), Entry 56 (regulation of labour in mines), Entry 70 (Union PSC), Entry 77 (SC establishment), Entry 79-80 (extension/exclusion of SC/HC jurisdiction), Entry 82-92B (taxes: income tax, customs, excise, service tax/GST), Entry 97 (residuary). State List (List II) — currently 61 entries. Key entries: Entry 1 (public order), Entry 2 (police), Entry 4 (prisons), Entry 5 (local government/panchayats/municipalities), Entry 6 (public health/sanitation/hospitals), Entry 14 (agriculture including pest control), Entry 18 (land/rights in land/tenures), Entry 21 (fisheries), Entry 26 (trade/commerce within state), Entry 41 (state PSC), Entry 45-63 (state taxes: land revenue, stamp duty, excise on alcohol, electricity duty, vehicle tax, entertainment tax, tolls, etc.). The 42nd Amendment (1976) transferred 5 subjects: Entry 25 (education — from State to Concurrent), Entry 17A (forests), Entry 33A (weights and measures), Entry 17B (protection of wild animals and birds), Entry 11A (administration of justice — constitution and organization of all courts except SC and HC).
Article 254 — Repugnancy Between Central and State Laws
Article 254 addresses the critical question of what happens when both Parliament and a state legislature have legislated on a Concurrent List subject and the two laws conflict. Art 254(1): If any provision of a state law is repugnant to (inconsistent with) a parliamentary law on a Concurrent List subject, the parliamentary law prevails and the state law is void to the extent of the repugnancy — whether the parliamentary law was enacted before or after the state law. Art 254(2): EXCEPTION — if a state law on a Concurrent List subject has been reserved for and received the President's assent, then the state law prevails in that state notwithstanding the repugnancy with the parliamentary law. However, Parliament can subsequently override even this state law by enacting new legislation on the same matter. Three conditions for Art 254(1) to apply: (a) both laws must be on a Concurrent List subject; (b) there must be a direct inconsistency (not merely an incidental overlap); (c) there must be an irreconcilable conflict such that both laws cannot operate simultaneously. The SC in M. Karunanidhi v. Union of India (1979) laid down two tests for repugnancy: (i) direct conflict test — the provisions of the two laws are directly inconsistent, and (ii) field occupation test — Parliament has intended to cover the entire field, leaving no room for state legislation. In Deep Chand v. State of UP (1959), the SC held that if there is a possibility of harmoniously construing the two laws, repugnancy should not be found — courts prefer to give effect to both laws. The doctrine of pith and substance also applies: if the two laws are on different subjects in pith and substance (even if they incidentally overlap), there is no repugnancy.
All India Services — Unique Federal Instrument
The All India Services (AIS) are a unique feature of Indian federalism — they serve both the Centre and the states, creating an administrative link that strengthens national unity. Article 312 empowers Parliament to create new All India Services if the Rajya Sabha passes a resolution by 2/3 majority that it is necessary in the national interest. Currently, there are three AIS: Indian Administrative Service (IAS), Indian Police Service (IPS), and Indian Forest Service (IFoS — created in 1966). The Indian Civil Service (ICS) of British India was the predecessor of the IAS. All India Services officers are recruited by the Centre (through UPSC) but serve under state governments for most of their careers. They are allocated to state cadres but can serve in Central deputation. The Centre retains ultimate authority over their discipline (Art 311) and can recall officers from state posting — though this is rarely exercised. The AIS Act, 1951 and the All India Services Rules govern their conditions. The Sarkaria Commission recommended strengthening the AIS, noting that they serve as the "steel frame" holding the federation together. Controversies: states have sometimes complained that AIS officers are "agents of the Centre" who do not understand local conditions; others argue they prevent the politicization of the bureaucracy at the state level. The Hota Committee (2004) and the Second Administrative Reforms Commission (2008) recommended reforms including lateral entry, performance-based assessments, and domain specialization. The lateral entry scheme launched in 2018 (direct appointment to Joint Secretary level) represents a new dimension of Centre-State administrative relations.
Fiscal Federalism — Cesses, Surcharges, and the Vertical Imbalance
The most contentious contemporary issue in Centre-State financial relations is the growing vertical fiscal imbalance created by the Centre's reliance on cesses and surcharges. Under Art 270, all taxes levied by the Union (except those under Art 268, 269, and cesses/surcharges) are shared with states based on the Finance Commission's devolution formula. However, cesses and surcharges are EXCLUDED from the divisible pool — they go entirely to the Centre. The Centre has dramatically increased its reliance on cesses and surcharges: from approximately 10% of gross tax revenue in 2011-12 to over 25% by 2022-23. Major cesses include: Health and Education Cess (4% on income tax), GST Compensation Cess (on sin goods — tobacco, luxury cars, aerated drinks), Road and Infrastructure Cess, Agriculture Infrastructure Development Cess. This means even though the 14th Finance Commission increased the states' share of the divisible pool from 32% to 42%, the effective share of states in total Central tax revenue has not increased proportionately because a larger share of revenue now comes from non-shareable cesses and surcharges. States have protested this as a violation of the spirit of fiscal federalism. The CAG has noted that many cesses are not credited to dedicated funds as required by law — they effectively become general revenue for the Centre, further undermining transparency. The 15th Finance Commission addressed this partly by recommending that the Centre rationalize cesses and surcharges and provide greater transparency. The debate fundamentally questions whether India's fiscal federalism is genuinely cooperative or is structured to favor the Centre despite formal devolution mechanisms.
Relevant Exams
One of the most important and frequently tested topics across all exams. UPSC Prelims tests: three lists and specific subject allocations (what's in which list, especially after 42nd Amendment transfers), five circumstances when Parliament legislates on State List (Art 249, 250, 252, 253, 356), Finance Commission recommendations, GST Council composition and voting, Art 254 repugnancy, and Sarkaria/Punchhi Commission recommendations. UPSC Mains asks about cooperative vs competitive federalism, fiscal federalism (cesses issue), Governor's role controversies, and Art 370 implications. SSC exams test list identification, article-provision matching, and commission names.