Article 270

Indian Economy glossary

Also called: Taxes shared between Union and States · Topic: Fiscal Federalism: Finance Commission, Devolution and Centre-State Finances · NCERT: Beyond NCERT

Meaning

Article 270 is the part of the Constitution that says the Union's taxes are collected by the Union and then split between the Union and the States. The States' portion is decided by the Finance Commission. The pool that gets shared is the divisible pool:

Divisible pool = Gross tax revenue − cesses − surcharges − cost of collection (taxes of Union Territories are also left out)

It matters because tax devolution under Article 270 is the largest untied transfer to States. Untied means States decide how to spend it. The "41%" headline also comes from this Article. And the main Centre–State dispute today is about what Article 270 leaves out.

Explanation

What is shared and what is not

  • Shared: all taxes in the Union List that the Union levies and collects. This covers income tax, corporation tax, customs and Union excise.

  • After the 101st Amendment (2016), it also covers CGST (Central GST) and the Union's portion of IGST (the GST on supplies between States).

  • Not shared:

  • Taxes under Art. 268 (levied by the Union, but collected and kept by States, such as stamp duty on cheques and bills of exchange).
  • Taxes under Art. 269 (assigned fully to States).
  • Surcharges, which go only to the Union under Art. 271.
  • Cesses (taxes collected for a named purpose, such as education or cleanliness), when levied for a specific purpose.

  • The cost of collection.

  • "Net proceeds" means what is left after the cost of collection. Under Art. 279, the CAG (Comptroller and Auditor General) checks and certifies this figure.

How the sharing works

  • Step 1: Vertical devolution. The Finance Commission (Art. 280) recommends what share of the divisible pool goes to all States together.
  • Step 2: Horizontal devolution. That combined share is then split among States using a formula. The formula weighs things like income distance, population, area and forest cover.
  • Step 3: Release. The Ministry of Finance pays the money out in monthly instalments. Sometimes it pays advance instalments early in the year.
  • Status: the FC's advice is advisory, not binding. But by convention, the Government always accepts its devolution share.

How Article 270 changed: from "some taxes" to "all taxes"

  • Before 2000: only income tax had to be shared. Union excise could be shared if Parliament chose to (old Art. 272).
  • 10th FC (K.C. Pant, 1995-2000): proposed an "alternative scheme". Under it, States would get 29% of all central taxes.
  • 80th Amendment (2000): wrote this scheme into Art. 270 and omitted Art. 272.

  • Why it helped States: their share now grows with every central tax, including fast-growing ones like corporation tax and customs.

  • 101st Amendment (2016): brought CGST and IGST into the shareable pool.

What makes States' real share rise or fall

  • The FC share itself: 29% (10th FC) → 42% (14th) → 41% (15th and 16th).
  • The size of cesses and surcharges. These are left out of the pool, so the more the Centre raises through them, the smaller the pool.
  • Their share of gross tax revenue rose from about 10% (early 2010s) to about 18-20% at the 2020-22 peak (verify current).

  • So States' effective share of gross tax revenue has been only about 30-32% in recent years (verify current), not 41%.

  • Worked example (illustrative numbers):

  • Gross tax revenue = ₹100. Cesses + surcharges = ₹18. Cost of collection = ₹2.
  • Divisible pool = 100 − 18 − 2 = ₹80.
  • States get 41% of 80 = ₹32.8. That is only 32.8% of gross tax revenue.
  • If cesses and surcharges rise to ₹25, the pool falls to ₹73. States then get ≈ ₹29.9, even though the "41%" has not changed.

In India

  • Institutions:
  • The Finance Commission (Art. 280) recommends the share.
  • The Ministry of Finance releases the money.
  • The CAG certifies the net proceeds.

  • The GST Council (Art. 279A) shapes the GST portion of the pool.

  • Vertical share under each Finance Commission:

FC Period States' share
10th (K.C. Pant) 1995-2000 29% of all central taxes
11th (A.M. Khusro) 2000-05 29.5%
12th (C. Rangarajan) 2005-10 30.5%
13th (Vijay Kelkar) 2010-15 32%
14th (Y.V. Reddy) 2015-20 42%
15th (N.K. Singh) 2020-26 41% (1% adjusted for the new UTs of J&K and Ladakh)
16th (Arvind Panagariya) 2026-31 41%
  • Latest position:
  • The 16th FC report was submitted on 17 November 2025 and tabled on 1 February 2026.
  • The Government accepted the 41% share (PIB, February 2026).

  • Many States had asked for 50%.

  • Horizontal formula (16th FC): income distance 42.5, population 2011 17.5, demographic performance 10, area 10, forest 10, and contribution to GDP 10 (new). The tax effort criterion was dropped.

  • States' demand: put a cap on cesses and surcharges (for example, a fixed share of gross tax revenue), or bring them into the divisible pool.

Don't confuse with

  • Art. 269: taxes there are levied and collected by the Union but assigned wholly to States. Under Art. 270, taxes are shared between the Union and States.
  • Art. 271 (surcharges): surcharges on Art. 269/270 taxes go only to the Union. They are never part of the divisible pool.
  • Art. 275 grants-in-aid: these are grants to States "in need of assistance", recommended by the FC and charged on the Consolidated Fund of India. Art. 270 deals with tax sharing, not grants. Both are statutory transfers.
  • Art. 282 discretionary grants and CSS: these are tied grants on terms the Centre sets. Art. 270 devolution is untied and decided by a formula.

Prelims Hooks

  • Art. 270 covers taxes levied and collected by the Union and shared with States. The 80th Amendment (2000) made this "all central taxes", following the 10th FC's alternative scheme.
  • Divisible pool = gross tax revenue − cesses − surcharges − cost of collection. Trap: "Cesses are part of the divisible pool" is FALSE.
  • Art. 272 (optional sharing of Union excise) was omitted by the 80th Amendment.
  • The 101st Amendment (2016) brought CGST and IGST under Art. 270 sharing.
  • The 41% (15th and 16th FC) is a share of the divisible pool, not of gross tax revenue. 42% was the 14th FC.
  • Trap: "FC devolution recommendations are binding" is FALSE. They are advisory and accepted by convention.

Mains Points

  • The shrinking pool: the share has stayed at 41%, but cesses and surcharges have grown to about 18-20% of gross tax revenue. So States really get only about 30-32% of gross tax revenue.
  • Possible reforms: cap cesses, bring them into the pool, or have the FC report the cess share every year.

  • This links to vertical fiscal imbalance (the Centre has more revenue powers, while States carry more spending duties).

  • Untied vs tied money: Art. 270 devolution lets States spend on their own priorities. CSS and conditional transfers do not.

  • The 16th FC ended revenue deficit grants, and States now face a 3% of GSDP limit on their fiscal deficit.

  • So devolution under Art. 270 is now even more important for fiscally weak States.

  • Equity vs efficiency: the horizontal split under Art. 270 is the root of the north-south debate. Examples are the move from 1971 to 2011 population data and the new GDP-contribution criterion (16th FC).

  • The pending Census and delimitation will reopen the question of which population year to use.

Recent developments

  • 2024-25 (Budget Estimates): The 41% share of the divisible pool came to only about 32% of the Union's gross tax revenue (GTR, meaning all taxes the Union collects). This is because cesses and surcharges stay outside the pool under Article 270. It is a current figure for the gap between the "41%" headline and what States actually get.
  • 2020-21 (PRS estimate): Cesses and surcharges reached about 24% of GTR, up from about 10–15% in 2011–20. Devolution fell to about 30% of GTR, down from about 35% in 2015–20. This shows that the shared pool shrinks when the Union raises more through levies it does not have to share.
  • October 2024: The Union released ₹1,78,173 crore. This was the regular instalment plus one advance instalment of ₹89,086.50 crore. An advance instalment is money paid before its due month, not extra money. It shows the Union using release timing to give States cash early, while the formula share stays the same.
  • 5 November 2026: In the first year of the 16th FC award, the regular monthly instalment of ₹1,09,019 crore was paid on 5 November instead of the usual 10 November. Uttar Pradesh got the most (₹19,208 crore) and Sikkim the least (₹365 crore). It was not an additional grant. It only helps States with cash during the festive season. Because the money is untied (States can spend it on anything), there is no guarantee it goes to capital spending.

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