Which of the following taxes is/are levied by the Union and collected and appropriated by the States ?

1. Constitutional Framework of Financial Relations (basic)

In any federal system, the division of power is not just about who makes the laws or who executes them; it is fundamentally about who holds the purse strings. The Indian Constitution, being federal in structure, ensures a clear division of legislative, executive, and financial powers between the Centre and the States. However, unlike the legislative or executive spheres where there is a clear demarcation, the financial framework is designed to ensure maximum harmony and coordination to keep the federal machinery running smoothly Laxmikanth, M. Indian Polity, Centre-State Relations, p.144.

The core of these financial relations is found in Part XII of the Constitution, spanning Articles 268 to 293. These provisions dictate how taxes are levied, who collects them, and how the resulting revenue is shared. A unique feature of the Indian setup is that the taxing power is often separated from the right to retain the revenue. For instance, some taxes are levied by the Union (to maintain uniformity across the country) but are collected and kept (appropriated) by the States. This arrangement helps States fund their local needs while benefiting from a centralized tax legislation Introduction to the Constitution of India, D. D. Basu, Distribution of Financial Powers, p.384.

A prime example of this is Article 268. Under this article, the Union government is responsible for levying certain duties, most notably Stamp Duties on commercial documents like bills of exchange, cheques, and promissory notes. However, the money doesn't go to the Central treasury; it is collected by the State where the duty is leviable and forms part of that State's revenue. It is also vital to distinguish these from items like Estate Duty on agricultural land, which falls entirely under the State List (Entry 48, List II). In the world of Indian fiscal federalism, the 'nature' of the tax (who levies it) and the 'destination' of the tax (who keeps it) are two distinct concepts you must master Laxmikanth, M. Indian Polity, Centre-State Relations, p.153.

Category	Levied By	Collected/Appropriated By	Examples
Article 268	Union	States	Stamp duties on bills of exchange, cheques, etc.
State List Powers	States	States	Estate duty on agricultural land, land revenue.

Sources: Indian Polity, M. Laxmikanth, Centre-State Relations, p.144, 152-153; Introduction to the Constitution of India, D. D. Basu, Distribution of Financial Powers, p.384

2. Taxing Powers: Seventh Schedule and Residuary Powers (basic)

In India, the authority to levy taxes is strictly governed by the Constitution to prevent arbitrary taxation. This distribution of power is primarily found in the Seventh Schedule, which divides subjects into three lists: the Union List (List I), the State List (List II), and the Concurrent List (List III). While List I and List II contain various specific tax entries, the Concurrent List generally avoids tax subjects to prevent jurisdictional conflicts between the Centre and the States Introduction to the Constitution of India, DISTRIBUTION OF LEGISLATIVE AND EXECUTIVE POWERS, p.377. For example, while the Union levies taxes on income (except agricultural income), the State has the exclusive power to levy Estate Duty specifically on agricultural land Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.384.

A unique feature of the Indian federal system is the concept of Residuary Powers. Under Article 248, any matter not mentioned in any of the three lists—including the power to impose a tax—falls under the exclusive jurisdiction of the Parliament. This is further reinforced by Entry 97 of the Union List. In the past, this residuary power has been used by the Union to justify the imposition of taxes like the Gift Tax and Expenditure Tax, which were not originally envisioned in the specific entries of the Seventh Schedule Indian Polity, Centre-State Relations, p.146.

Furthermore, the Constitution makes a sophisticated distinction between the power to levy (make the law for the tax) and the power to appropriate (keep the revenue). A prime example is Article 268, which covers certain duties like Stamp Duties on bills of exchange and insurance policies. Here, the Union levies the tax to ensure uniformity across the country, but the States are responsible for collecting the revenue and keeping it for their own use Indian Polity, Centre-State Relations, p.153.

Sources: Introduction to the Constitution of India, DISTRIBUTION OF LEGISLATIVE AND EXECUTIVE POWERS, p.377; Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.384; Indian Polity, Centre-State Relations, p.146; Indian Polity, Centre-State Relations, p.153

3. Grants-in-Aid: Statutory vs. Discretionary (intermediate)

In our federal setup, the Union is assigned the most elastic and productive tax sources, while the States are responsible for the bulk of welfare and developmental activities. This creates a vertical fiscal imbalance. To bridge this gap, the Constitution provides for Grants-in-Aid. Think of these not just as 'gifts,' but as essential tools to ensure that even the financially weaker States can provide a minimum standard of public services to their citizens.

Statutory Grants (Article 275): These are grants given to States that are in need of financial assistance. Unlike tax sharing, they are not given to every State. The Finance Commission recommends the principles for these grants Indian Economy, Vivek Singh, Government Budgeting, p.182. A critical feature of Statutory Grants is that they are charged on the Consolidated Fund of India every year, meaning they can be discussed in Parliament but are not subject to a vote Indian Polity, M. Laxmikanth, Centre-State Relations, p.155. This provides financial security to the States. These grants also include specific sums for the welfare of Scheduled Tribes and the administration of Scheduled Areas.

Discretionary Grants (Article 282): This provision allows both the Centre and the States to make grants for any 'public purpose,' even if that purpose doesn't fall within their specific legislative powers. These are called 'discretionary' because the Centre is under no constitutional obligation to provide them. Historically, these were used extensively by the Union to fund Five-Year Plans and to give the Centre 'leverage' to influence State actions to match national priorities Indian Polity, M. Laxmikanth, Centre-State Relations, p.155.

Feature	Statutory Grants (Art. 275)	Discretionary Grants (Art. 282)
Nature	Obligatory based on need.	Purely at the Union's discretion.
Recommendation	Finance Commission.	Executive/NITI Aayog context.
Fund Source	Charged on Consolidated Fund of India.	Votable expenditure.

Sources: Indian Polity, M. Laxmikanth, Centre-State Relations, p.155; Indian Economy, Vivek Singh, Government Budgeting, p.182

4. Impact of GST on Centre-State Relations (intermediate)

The introduction of the Goods and Services Tax (GST) via the 101st Amendment Act, 2016, represents perhaps the most significant shift in Indian federalism since independence. Historically, the Constitution maintained a strict separation of taxing powers: the Centre taxed services and manufacturing (excise), while States taxed the sale of goods (VAT/Sales Tax). GST demolished these silos, replacing them with a model of 'Shared Sovereignty'. Under the new Article 246A, both Parliament and State Legislatures now possess the simultaneous power to make laws with respect to GST. This means neither level of government can unilaterally change tax rates on most goods and services, marking a transition from fiscal autonomy to fiscal interdependence D. D. Basu, Introduction to the Constitution of India, Table, p.525.

To manage this interdependence, the GST Council was created under Article 279A. This is a unique federal body where the Union Finance Minister and Finance Ministers of all States sit together to decide on tax rates, exemptions, and thresholds. The voting structure is designed to ensure consensus: the Centre holds 1/3rd of the voting power, while all States combined hold 2/3rd. Since any decision requires a 75% majority, neither the Centre nor the States can pass a resolution without the support of the other. While this promotes Cooperative Federalism, critics argue it limits a State's 'fiscal space,' as they can no longer tweak tax rates to meet local emergencies or social goals, except for items currently outside the GST ambit like alcohol for human consumption and petroleum products Vivek Singh, Indian Economy, Government Budgeting, p.179.

Feature	Pre-GST Era	Post-GST Era
Taxing Power	Exclusive (Separated by Lists)	Simultaneous/Shared (Article 246A)
Decision Making	Unilateral by respective governments	Collective via GST Council
Nature of Federalism	Coordinate Federalism	Cooperative/Collaborative Federalism

Furthermore, the 101st Amendment significantly altered the distribution of revenues. It omitted Article 268A (which dealt with service tax) and amended Articles 269 and 270 to facilitate the sharing of Integrated GST (IGST) and Central GST (CGST) between the Union and the States M. Laxmikanth, Indian Polity, Chapter 15, p.153. To ease the transition, the Centre initially guaranteed States compensation for any revenue loss for five years, a mechanism that became a focal point of tension during the economic slowdown and the pandemic, highlighting the delicate balance of trust in Centre-State financial relations.

Sources: Introduction to the Constitution of India, D. D. Basu, Tables, p.525; Indian Economy, Vivek Singh, Government Budgeting, p.179; Indian Polity, M. Laxmikanth, Centre State Relations, p.153

5. Distribution Categories: Articles 269, 269A, and 270 (exam-level)

In our federal setup, there is a natural "fiscal imbalance": the Union has the most productive sources of revenue, while the States have the most expensive social responsibilities. To bridge this gap, the Constitution provides a sophisticated mechanism for sharing resources. While we previously looked at taxes collected by States (Article 268), today we focus on the higher-tier categories where the Union takes the lead in administration but shares the bounty.

Article 269 deals with taxes that are levied and collected by the Union but assigned to the States. Think of the Union as a professional collection agent here; it manages the process because the tax involves inter-state transactions, which would be chaotic if every state had its own rules. These primarily include taxes on the inter-state sale or purchase of goods (other than newspapers) and the inter-state consignment of goods Indian Polity, M. Laxmikanth, Chapter 15, p. 153. Crucially, these proceeds do not form part of the Consolidated Fund of India; they are distributed among the states according to principles formulated by Parliament.

With the 101st Amendment, Article 269A was introduced to govern the Goods and Services Tax (GST) in the course of inter-state trade. This Integrated GST (IGST) is levied and collected by the Union, but the proceeds are apportioned between the Union and the States as recommended by the GST Council. This ensures that the "destination state" (where the goods are consumed) gets its fair share of the revenue Introduction to the Constitution of India, D. D. Basu, Chapter 25, p. 385.

Finally, Article 270 is the "Great Pool." It covers taxes that are levied and collected by the Union but distributed between the Union and the States. Following the 80th Amendment and the 101st Amendment, this category has become a massive "divisible pool" containing almost all Union taxes and duties (like Income Tax and Corporation Tax), excluding certain cesses and surcharges. The ratio of this distribution is not fixed by the Constitution but is decided based on the recommendations of the Finance Commission Indian Polity, M. Laxmikanth, Chapter 15, p. 154.

Article	Nature of Distribution	Key Examples/Notes
269	Levied & Collected by Union; Assigned to States	Inter-state trade (non-GST goods), Consignment of goods.
269A	Inter-state GST (IGST)	Apportioned between Union & States per GST Council.
270	Levied & Collected by Union; Shared with States	The "Divisible Pool" (Income Tax, etc.) per Finance Commission.

Sources: Indian Polity, Chapter 15: Centre-State Relations, p.153-154; Introduction to the Constitution of India, Chapter 25: Distribution of Financial Powers, p.385

6. The Special Case: Article 268 Explained (exam-level)

In the intricate web of Indian financial federalism, the Constitution seeks to balance the need for national uniformity with the fiscal autonomy of the States. Article 268 represents a unique hybrid category designed for this very purpose. Under this provision, certain duties are levied by the Union (meaning the Central Parliament determines the rates and the law), but they are collected and appropriated by the States. This means that while the law is made in Delhi, the actual money is gathered by state officials and stays entirely within the state's treasury to be spent on state-specific needs Introduction to the Constitution of India, D. D. Basu (26th ed.), Chapter 25, p.386.

A critical technical point to remember for the exam is that the proceeds of these duties do not form part of the Consolidated Fund of India. Instead, they are assigned to the state in which they are leviable. This is a deliberate design choice: by allowing the Union to levy the tax, the Constitution ensures that a "bill of exchange" or a "share transfer" isn't taxed at wildly different rates in Maharashtra versus West Bengal, which would hamper national commerce. However, by giving the revenue to the States, the Constitution ensures they have a steady stream of income from the commercial activities happening within their borders Laxmikanth, M. Indian Polity. 7th ed., Chapter 15, p.153.

The primary items falling under this umbrella are Stamp Duties on specific financial instruments. These include bills of exchange, cheques, promissory notes, policies of insurance, and the transfer of shares. It is vital to distinguish these from other stamp duties on property or land, which are typically governed and collected entirely by the State under the State List Introduction to the Constitution of India, D. D. Basu (26th ed.), Chapter 25, p.386. Historically, this category also included excise duties on medicinal and toilet preparations containing alcohol, though the landscape of indirect taxes has shifted significantly with the introduction of the GST.

Sources: Indian Polity by M. Laxmikanth, Centre-State Relations, p.153; Introduction to the Constitution of India by D.D. Basu, Distribution of Financial Powers, p.384-386

7. Solving the Original PYQ (exam-level)

Now that you have mastered the framework of Centre-State Financial Relations, you can see how the UPSC tests your ability to distinguish between the four categories of tax distribution. This specific question targets Article 268 of the Constitution, which describes a unique arrangement where the Union sets the uniform rate (levies) to ensure commercial stability across the country, but the States handle the administration and keep the revenue. As you learned in the modules, (A) Stamp Duties on instruments like bills of exchange and policies of insurance are the textbook example of this category, making them the correct answer. This mechanism helps States generate independent revenue while maintaining national consistency for legal documents, a point emphasized in Laxmikanth, M. Indian Polity.

To arrive at the correct answer, you must systematically eliminate the distractors that UPSC uses to confuse students. For instance, Passenger and Goods Tax is generally a State List subject (Entry 56), meaning the State both levies and collects it—it doesn't involve the Union at all. Estate Duty is a classic UPSC trap; while it involves the Union for non-agricultural property, it falls under different constitutional provisions (formerly Article 269) and, for agricultural land, it is strictly a State subject as noted in Introduction to the Constitution of India, D. D. Basu. Similarly, Taxes on Newspapers were traditionally levied by the Union and assigned to the States, which is a different fiscal logic than the collected and appropriated mandate of Article 268. By recognizing these subtle shifts in administrative vs. legislative power, you can avoid these common pitfalls.