Consider the following statements: In India, taxes on transactions in Stock exchanges and futures markets are 1. levied by the Union 2. Collected by the States Which of the statements given above is/are correct?

1. The Seventh Schedule: Architecture of Indian Federalism (basic)

At its heart, federalism is a system of government where power is divided between a central authority and constituent political units (like States). To prevent these two levels of government from clashing over who has the right to make laws, the Constitution of India provides a clear blueprint called the Seventh Schedule. Think of it as a master list that marks the boundaries of authority, ensuring that both the Centre and the States know exactly where their jurisdiction begins and ends. While the Constitution divides legislative, executive, and financial powers, it is important to note that India maintains an integrated judicial system to enforce both Central and State laws, rather than having separate federal and state courts Indian Polity, Centre-State Relations, p.144.

The Seventh Schedule categorizes governmental functions into three distinct lists:

List	Scope & Jurisdiction	Number of Subjects
List I (Union List)	Subjects of national importance where uniformity is required across the country (e.g., Defence, Foreign Affairs, Banking). Only the Parliament can legislate here.	98 (Originally 97)
List II (State List)	Subjects of local or regional importance (e.g., Public Order, Police, Agriculture). State Legislatures have exclusive power to make laws here under normal circumstances.	59 (Originally 66)
List III (Concurrent List)	Subjects where both the Centre and States can make laws (e.g., Education, Marriage, Forests). If their laws conflict, the Central law generally prevails.	52 (Originally 47)

But what happens if a new issue arises that isn't mentioned in any of these lists—like cyber laws or space exploration? These are called Residuary Subjects. In the Indian federal architecture, the power to legislate on residuary subjects is vested solely with the Union Parliament Indian Polity, Federal System, p.139. This design ensures that the Union remains strong and capable of handling unforeseen national challenges, a structure that traces its roots back to the division of powers found in the Government of India Act, 1935 Introduction to the Constitution of India, THE HISTORICAL BACKGROUND, p.9.

Sources: Indian Polity, Federal System, p.139; Introduction to the Constitution of India, THE HISTORICAL BACKGROUND, p.9; Indian Polity, Centre-State Relations, p.144

2. Constitutional Framework of Financial Relations (basic)

In any federal system, for the Union and the States to function effectively, they must have their own independent sources of revenue. As noted by experts like Granville Austin, Indian federalism is a form of 'co-operative federalism', which seeks a balance between a strong central authority and functional autonomy for the States D. D. Basu, Introduction to the Constitution of India, NATURE OF THE FEDERAL SYSTEM, p.67. To ensure this balance, the Constitution provides an elaborate framework for the distribution of financial resources, largely inspired by the Government of India Act, 1935. This framework ensures that both levels of government have adequate funds to discharge their constitutional responsibilities D. D. Basu, Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.383.

The Seventh Schedule is the heart of this distribution. While we often focus on the legislative powers (who makes the laws), the Schedule also specifies who has the power to levy taxes. For instance, the Union List contains specific entries that grant the Centre exclusive power over certain high-value or nationwide economic activities. A classic example is Entry 90 of the Union List, which assigns "Taxes other than stamp duties on transactions in stock exchanges and futures markets" to the Union. This means the power to impose these transaction taxes rests solely with the Central government, ensuring uniformity across the national financial markets.

It is important to distinguish between the power to levy (impose) a tax and the power to collect or retain its proceeds. While the Union levies many taxes, the Constitution (through various amendments like the 101st Amendment Act) and the Finance Commission's recommendations often require these proceeds to be shared with the States D. D. Basu, Introduction to the Constitution of India, TABLES, p.525. This intricate web of financial relations prevents any one tier of government from becoming financially crippled, maintaining the structural integrity of our federal setup.

Sources: Introduction to the Constitution of India, D. D. Basu (26th ed.), NATURE OF THE FEDERAL SYSTEM, p.67; Introduction to the Constitution of India, D. D. Basu (26th ed.), DISTRIBUTION OF FINANCIAL POWERS, p.383; Introduction to the Constitution of India, D. D. Basu (26th ed.), TABLES, p.525

3. Exclusive Taxing Powers: Union List vs. State List (intermediate)

To understand the fiscal architecture of India, we must first recognize that the Constitution maintains a strict distinction between the power to levy a tax and the power to appropriate its proceeds. Under the Seventh Schedule, the Union and the State lists contain specific entries that grant 'exclusive' taxing powers to the respective governments. This means that for a subject listed in the Union List, only Parliament can make laws to impose a tax, while for those in the State List, the State Legislature holds the sole authority Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.384. One of the most critical areas of Union exclusivity relates to the regulation of national markets and interstate commerce. For instance, while states can levy stamp duties on certain documents, Entry 90 of the Union List specifically empowers the Centre to levy taxes on transactions in stock exchanges and futures markets (other than stamp duties). This ensures uniformity in the financial sector across the country. Furthermore, the Union enjoys residuary taxing power under Entry 97 of List I; this has been the legal basis for the Parliament to introduce modern levies like the Gift Tax or the Expenditure Tax, which were not explicitly mentioned in the original lists Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.384. Conversely, the State List provides exclusive powers over local and land-based revenues. Common examples include Land Revenue, Taxes on Agricultural Income, and Taxes on Mineral Rights. However, even 'exclusive' powers can have constitutional ceilings. A classic example is the Profession Tax (Entry 60, List II). While the State has the exclusive right to levy it, Article 276(2) caps the total amount payable by any one person at ₹2,500 per annum to prevent the State from encroaching upon the Union's domain of Income Tax Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.384.

Feature	Union List (List I) Examples	State List (List II) Examples
Core Domain	Income tax (non-agri), Customs, Stock exchange transactions.	Land revenue, Agri-income, Alcohol excise, Profession tax.
Residuary Power	Belongs to the Union (Entry 97).	No residuary taxing power.

Sources: Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.384; Indian Polity, M. Laxmikanth, World Constitutions, p.704

4. The Finance Commission and Devolution of Funds (intermediate)

In our previous hops, we looked at how the Seventh Schedule divides the power to levy taxes between the Union and the States. However, this creates a 'fiscal imbalance': the Union has the most productive sources of revenue (like Income Tax and Corporation Tax), while the States carry the heavy burden of social welfare, health, and education. To bridge this gap, the Constitution provides for a balancing wheel known as the Finance Commission (FC).

Under Article 280, the President of India constitutes a Finance Commission every five years. Its primary job is to recommend the distribution of the 'net proceeds' of taxes between the Union and the States. This process is called Devolution. There are two dimensions to this:

• Vertical Devolution: This is the percentage share of the 'divisible pool' of central taxes that goes to all States combined. For instance, the 15th Finance Commission recommended a 41% share for States Indian Economy (Vivek Singh), Government Budgeting, p.182.
• Horizontal Devolution: This is the formula used to decide how that 41% is divided among the various States (e.g., how much goes to UP vs. Kerala). It uses criteria like population, area, and 'income distance' to ensure equity Indian Economy (Nitin Singhania), Indian Tax Structure and Public Finance, p.123.

Beyond tax sharing, the Commission also recommends Grants-in-aid to States under Article 275 and suggests measures to augment the Consolidated Fund of a State to supplement the resources of local bodies like Panchayats and Municipalities, based on the findings of State Finance Commissions Introduction to the Constitution of India (D.D. Basu), MUNICIPALITIES AND PLANNING COMMITTEES, p.326.

Aspect	Vertical Devolution	Horizontal Devolution
Definition	Division between Union and States.	Division among different States.
Current Status	41% of the divisible pool.	Based on 2011 Population, Area, Forest cover, etc.
Recipient	All States collectively.	Individual States based on need/performance.

Sources: Introduction to the Constitution of India (D.D. Basu), DISTRIBUTION OF FINANCIAL POWERS, p.387; Indian Economy (Vivek Singh), Government Budgeting, p.182; Indian Economy (Nitin Singhania), Indian Tax Structure and Public Finance, p.123; Indian Polity (M. Laxmikanth), Finance Commission, p.433

5. Impact of 101st Amendment and GST on Fiscal Federalism (intermediate)

Before the 101st Constitutional Amendment Act of 2016, the Seventh Schedule maintained a strict 'water-tight' separation of taxing powers: the Union levied duties on manufacture (Excise) and services, while States levied taxes on the sale of goods (VAT/Sales Tax). This system often led to the cascading of taxes (tax on tax). The 101st Amendment fundamentally restructured this by introducing the Goods and Services Tax (GST), a comprehensive indirect tax on manufacture, sale, and consumption across India Introduction to the Constitution of India, D. D. Basu (26th ed.), DISTRIBUTION OF FINANCIAL POWERS, p.392. This reform is considered the most significant shift in fiscal federalism since independence because it replaced the competitive tax silos with a cooperative framework.

The legal heart of this change is Article 246A. Unlike the standard Seventh Schedule lists where an item belongs to either the Union or the State, Article 246A grants simultaneous power to both Parliament and State Legislatures to make laws regarding GST Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.83. To harmonize this shared power, Article 279A empowered the President to constitute the GST Council Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.94. This Council, consisting of the Union Finance Minister and representatives from all States, acts as the decision-making body for tax rates, exemptions, and thresholds.

While States surrendered their individual autonomy to fix tax rates independently, they gained a collective voice in a 'Pooled Sovereignty' model. This transition is summarized below:

Feature	Pre-GST (Old Federalism)	Post-GST (101st Amendment)
Taxing Power	Separated (Union vs. State lists)	Simultaneous/Concurrent (Article 246A)
Decision Making	Unilateral by respective governments	Collective via GST Council (Article 279A)
Rate Revision	Required amending specific Acts if above ceiling Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.149	Council decision followed by Gazette notification

Sources: Introduction to the Constitution of India, D. D. Basu (26th ed.), DISTRIBUTION OF FINANCIAL POWERS, p.392; Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.83; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.94; Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.149

6. The Mechanics of Revenue Distribution (Articles 268-270) (exam-level)

In our previous hops, we explored how the Seventh Schedule divides the power to make laws. However, the power to levy a tax and the right to keep the money are not always the same in the Indian federal system. To address the vertical fiscal imbalance—where the Union has more tax-raising power but the States have more social welfare responsibilities—the Constitution provides a 'plumbing system' for revenue through Articles 268, 269, and 270.

As noted in Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.385, the yield from State taxes may not be enough to meet their needs. Therefore, the Constitution creates distinct categories of distribution based on who levies (imposes), who collects, and who appropriates (keeps) the revenue. The most common category today is Article 270, which covers the 'Divisible Pool'—taxes like Income Tax and Corporation Tax that are levied and collected by the Union but shared with the States based on the Finance Commission's recommendations.

The mechanics can be summarized in this table:

Article	Type of Tax	Levied by	Collected by	Appropriated by (Kept by)
268	Stamp duties on bills of exchange, etc.	Union	States	States
269	Inter-state trade/consignment taxes	Union	Union	States (Assigned to them)
270	General Central Taxes (Income Tax, etc.)	Union	Union	Shared (Union & States)

It is important to distinguish these from Entry 90 of the Union List, which gives the Centre the power to levy taxes on transactions in stock exchanges and futures markets (other than stamp duties). While the Union holds the legislative power over these transaction taxes, the distribution of the proceeds follows the specific rules laid out in these Articles. For instance, stamp duties mentioned in Article 268 are levied by the Union but collected and kept by the States within their territories. Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.386.

Sources: Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.385-386; Indian Polity, Centre-State Relations, p.153; Indian Polity, World Constitutions, p.703

7. Taxation on Stock Exchanges and Futures Markets (exam-level)

When we look at the Seventh Schedule of the Indian Constitution, the distribution of taxing powers is designed to ensure economic stability and uniformity across the country. Entry 90 of the Union List specifically empowers the Central Government to levy "Taxes other than stamp duties on transactions in stock exchanges and futures markets" Indian Polity, World Constitutions, p.710. The logic behind placing this under the Union List is simple: stock markets and futures markets are national in character. If every state were allowed to levy its own transaction tax at different rates, it would lead to market fragmentation and "tax arbitrage," where investors would flock only to states with the lowest rates, disrupting the national economy.

It is crucial to distinguish between the transaction tax and stamp duties. While the Union levies taxes on the transaction itself (such as the Securities Transaction Tax or STT), the Constitution handles stamp duties separately. Under Entry 91 of the Union List, the Centre sets the rates of stamp duty for specific instruments like shares and debentures to ensure uniformity, but the actual collection and appropriation of these duties often involve the States Indian Economy, Government Budgeting, p.173. However, for the specific transaction-based taxes mentioned in Entry 90, the power resides firmly with the Union.

In practice, the most prominent example of this power is the Securities Transaction Tax (STT). Introduced in 2004, STT is a direct tax levied on every purchase and sale of equities, derivatives, and equity-oriented mutual funds listed on a recognized stock exchange in India Indian Economy, Government Budgeting, p.170. Because this falls under Entry 90, the Central Government has the sole authority to decide the tax rates and the method of collection, ensuring a seamless trading experience from Mumbai to Mizoram.

Feature	Transaction Taxes (Entry 90)	Stamp Duties (Entry 91)
Authority	Union List (Centre)	Union List (for Rates)
Scope	Tax on the act of trading/transaction	Tax on the legal instrument/document
Example	Securities Transaction Tax (STT)	Duty on share transfer certificates

Sources: Indian Polity, World Constitutions, p.710; Indian Economy, Government Budgeting, p.173; Indian Economy, Government Budgeting, p.170

8. Solving the Original PYQ (exam-level)

This question is a perfect application of your study on the Seventh Schedule and the distribution of fiscal powers between the Union and the States. You recently learned about the three lists—Union, State, and Concurrent—and how specific tax entries define the financial jurisdiction of each level of government. Here, the core building block is Entry 90 of the Union List, which specifically grants the power to tax transactions in stock exchanges and futures markets to the Central government. By identifying this as a Union subject, you can immediately validate that the authority to levy these taxes rests solely with the Centre, aligning with the constitutional framework explained in Indian Polity by M. Laxmikanth.

To arrive at the correct answer, (A) 1 only, you must navigate the nuanced distinction between levy and collection. While the Union levies these transaction taxes, they are also administered and collected at the central level. The trap UPSC sets here—and the reason Option (C) is a common mistake—is the confusion with Stamp Duties (Entry 91). Under Article 268, Stamp Duties on these same transactions are levied by the Union but collected and appropriated by the States. However, for "taxes other than stamp duties" (like the Securities Transaction Tax), the States have no role in collection. Recognizing this subtle "Stamp Duty exception" is the key to avoiding the incorrect conclusion that States collect all taxes related to stock markets.