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Taxation Laws

Fiscal Federalism: Revenue Sharing and Finance Commission

The Union collects the most productive taxes, while the States carry much of the spending. The Constitution bridges the gap by sharing revenue: some taxes go wholly to the States, some are shared, and the Finance Commission recommends how the shared taxes and grants are divided. This note covers Articles 268 to 281, the GST provisions on sharing, and the Sixteenth Finance Commission's award for 2026 to 2031.

1. Categories of Taxes

Who levies, who collects, who keeps

Figure 1: Who levies, who collects, who keeps

  • Article 268. Stamp duties mentioned in the Union List are levied by the Union but collected by the States (by the Union in Union Territories), and the proceeds go to the States.
  • Article 269. Taxes on the sale or purchase and consignment of goods in the course of inter-State trade are levied and collected by the Union but assigned to the States.
  • Article 270. All other Union List taxes form the divisible pool shared with the States, except taxes under Articles 268, 269 and 269A, surcharges under Article 271 and cesses levied for specific purposes.
  • Article 271. Parliament may levy a surcharge on taxes under Articles 269 and 270 for the purposes of the Union, other than GST under Article 246A.
  • GST. Inter-State GST is apportioned under Article 269A on the GST Council's recommendation; Central GST is shared through Article 270.

2. Grants

  • Article 275. Statutory grants in aid charged on the Consolidated Fund of India to States in need of assistance, including grants for the welfare of Scheduled Tribes and the administration of Scheduled Areas.
  • Article 282. Discretionary grants by the Union or a State for any public purpose.

3. The Finance Commission

Articles 280 and 281

Figure 2: Articles 280 and 281

  • Constitution. The President constitutes a Finance Commission every fifth year, or earlier, consisting of a Chairman and four other members; Parliament prescribes their qualifications (Finance Commission (Miscellaneous Provisions) Act, 1951)
  • Duties. To recommend the distribution of the net proceeds of shareable taxes between the Union and the States and among the States, the principles governing grants in aid, measures to augment State funds for panchayats and municipalities, and any other matter referred by the President.
  • Article 281. The President lays the recommendations, with an explanatory memorandum on action taken, before each House of Parliament.
  • Nature. The recommendations are advisory, not binding, though in practice the core devolution recommendations are generally accepted.

4. The Sixteenth Finance Commission (2026 to 2031)

Fifteenth and Sixteenth Finance Commissions compared

Figure 3: Fifteenth and Sixteenth Finance Commissions compared

The Sixteenth Finance Commission, chaired by Dr. Arvind Panagariya, covers 2026-27 to 2030-31. Its report was tabled in Parliament on 1 February 2026, and the Government accepted the recommendation to keep the States' share of the divisible pool at 41 per cent. It introduced contribution to GDP as a new criterion with a 10 per cent weight, dropped tax and fiscal effort, and discontinued revenue deficit grants and sector and State specific grants, while recommending grants to rural and urban local bodies.

⚠ Exam trap

Stamp duties under Article 268 are levied by the Union but collected and kept by the States. Article 269 taxes are levied and collected by the Union but assigned to the States. The divisible pool under Article 270 excludes Articles 268, 269 and 269A taxes, Article 271 surcharges and specific purpose cesses. The Finance Commission is constituted every fifth year with a Chairman and four members, and its recommendations are laid before Parliament under Article 281. The Sixteenth Finance Commission kept the vertical share at 41 per cent for 2026 to 2031.

5. Frequently Asked Questions

What share of central taxes goes to the States for 2026 to 2031?

41 per cent of the divisible pool, as recommended by the Sixteenth Finance Commission and accepted by the Government, the same share as under the Fifteenth Finance Commission.

Are Finance Commission recommendations binding?

No. They are recommendations to the President, laid before Parliament under Article 281 with an explanatory memorandum, though the devolution recommendations are generally accepted.

Are cesses and surcharges shared with the States?

No. Article 270(1) excludes surcharges under Article 271 and cesses levied for specific purposes from the divisible pool, so their proceeds stay with the Union.

Who chairs the Sixteenth Finance Commission?

Dr. Arvind Panagariya. The Commission's award covers the five years from 2026-27 to 2030-31.

6. Related Topics

  • Topic 1: Concept, Canons and Constitutional Scheme. Cesses and surcharges.
  • Topic 5: Restrictions and Immunities. Limits on taxing power.
  • Topic 26: GST, the 101st Amendment and the GST Council. GST sharing in detail.