Which of the following bodies is responsible for the distribution of revenues between the Centre and the States?

1. Introduction to Fiscal Federalism in India (basic)

To understand the Finance Commission, we must first understand the spirit of Fiscal Federalism. In a federal country like India, the Constitution divides powers—legislative, executive, and financial—between the Union and the States to ensure both levels of government can function independently and effectively Laxmikanth, M. Indian Polity, Chapter 15, p.144. However, there is an inherent challenge: the Union government has the most significant tax-raising powers (like Income Tax and GST), while the States are responsible for the bulk of public welfare spending, such as health and education. This creates a vertical imbalance where the Centre has the money, but the States have the responsibilities D. D. Basu, Introduction to the Constitution of India, Distribution of Financial Powers, p.383.

To bridge this gap, the Constitution provides a unique 'balancing wheel'—the Finance Commission. Established under Article 280, it is a quasi-judicial body constituted by the President of India every five years (or earlier). Its primary role is to provide a fair and impartial formula for sharing the 'net proceeds' of taxes. This ensures that the federal system remains stable and that no State is left behind due to a lack of resources Laxmikanth, M. Indian Polity, Chapter 15, p.156.

The Commission's recommendations generally focus on two types of sharing: Vertical Devolution (how much of the total tax pool goes from the Centre to all States) and Horizontal Devolution (how that money is then divided among individual States based on their specific needs). While other bodies like NITI Aayog focus on policy coordination and federal cooperation, the Finance Commission remains the supreme constitutional authority for the actual distribution of tax revenues Vivek Singh, Indian Economy, Chapter 4, p.182.

Sources: Indian Polity, M. Laxmikanth(7th ed.), Chapter 15: Centre-State Relations, p.144, 156; Introduction to the Constitution of India, D. D. Basu (26th ed.), Distribution of Financial Powers, p.383; Indian Economy, Vivek Singh (7th ed. 2023-24), Chapter 4: Government Budgeting, p.182

2. Constitutional Scheme of Taxation (Articles 268-293) (intermediate)

To understand why we need a Finance Commission, we must first understand the "financial map" of our Constitution. India follows a federal structure, but if you look closely at the Seventh Schedule, you will notice a deliberate tilt. The Union List (List I) contains the most productive sources of revenue (like Corporation Tax and Income Tax), while the State List (List II) contains subjects that require heavy spending (like Health, Education, and Agriculture) but offer limited tax revenue. This creates a vertical fiscal imbalance—the Centre has the money, but the States have the work.

The Constitution-makers handled this by dividing taxing powers clearly to avoid confusion. According to M. Laxmikanth, Centre-State Relations, p.152, the Parliament has exclusive power to levy taxes on subjects in the Union List, while State Legislatures handle the State List. Interestingly, unlike legislative subjects, there were historically no tax entries in the Concurrent List to prevent both levels of government from taxing the same thing and creating chaos. This changed only with the 101st Amendment Act of 2016, which introduced GST (Article 246A), allowing both Parliament and States to tax goods and services concurrently.

The distribution of these taxes isn't a simple "finder's keepers" rule. The Constitution distinguishes between who levies (imposes) the tax, who collects it, and who gets to appropriate (keep/use) the money. This is where Articles 268 to 271 come in:

Article	Nature of Distribution	Examples / Notes
268	Levied by Centre, but Collected and Appropriated by States.	Stamp duties on bills of exchange, etc. D. D. Basu, Tables, p.525
269	Levied and Collected by Centre, but assigned to States.	Taxes on the sale/purchase of goods in inter-state trade.
270	Levied and Collected by Centre, but distributed between Centre and States.	The "Divisible Pool"—most Central taxes fall here (Income Tax, Corp Tax).
271	Surcharge on certain taxes for Union purposes.	Goes exclusively to the Centre; not shared with States.

Finally, the 101st Amendment significantly revamped this scheme. It omitted Article 268A and amended Articles 268, 269, and 270 to accommodate the GST regime D. D. Basu, Tables, p.525. It also introduced Article 269A to handle the Integrated GST (IGST) on inter-state trade, ensuring that the revenue is shared between the Union and the States based on the recommendations of the GST Council.

Sources: Indian Polity, M. Laxmikanth, Chapter 15: Centre-State Relations, p.152; Introduction to the Constitution of India, D. D. Basu, Distribution of Legislative and Executive Powers, p.377; Introduction to the Constitution of India, D. D. Basu, Tables, p.525

3. Administrative Cooperation: The Inter-State Council (basic)

In the complex architecture of Indian federalism, while the Finance Commission manages the 'fiscal' or monetary aspect of relations, the Inter-State Council (ISC) is the vital organ for administrative coordination. The Constitution, under Article 263, does not make the Council mandatory; instead, it gives the President the power to establish it whenever they feel the 'public interest' would be served by such a body Indian Polity, M. Laxmikanth, Inter-State Relations, p.167. This makes it a flexible tool for bridging the gap between the Union and the States, ensuring that the 'dual polity' of India works in harmony rather than in conflict. For many years, this provision remained largely unused. It was the Sarkaria Commission (1983–88) that made a powerful case for a permanent forum, arguing that coordination is essential for the effective operation of a federal system Indian Polity, M. Laxmikanth, Centre-State Relations, p.144. Acting on these recommendations, the Inter-State Council was finally established in 1990 by the V.P. Singh-led government Indian Polity, M. Laxmikanth, Centre-State Relations, p.160. To distinguish it from other technical bodies under the same Article, the Sarkaria Commission even suggested it be called the 'Inter-Governmental Council.' Today, the Council stands as a high-level political forum. Its composition reflects its importance: it is chaired by the Prime Minister and includes the Chief Ministers of all States and Union Territories with legislative assemblies Indian Polity, M. Laxmikanth, Inter-State Relations, p.168. By bringing the top executive leadership of the Centre and States to one table, the ISC facilitates liaison, cooperation, and joint action on issues of common interest, much like the All-India Services do at the administrative level Indian Polity, M. Laxmikanth, Centre-State Relations, p.150.

Sources: Indian Polity, M. Laxmikanth(7th ed.), Inter-State Relations, p.167; Indian Polity, M. Laxmikanth(7th ed.), Inter-State Relations, p.168; Indian Polity, M. Laxmikanth(7th ed.), Centre-State Relations, p.144; Indian Polity, M. Laxmikanth(7th ed.), Centre-State Relations, p.150; Indian Polity, M. Laxmikanth(7th ed.), Centre-State Relations, p.160

4. From Planning Commission to NITI Aayog (basic)

Для того чтобы понять современную фискальную архитектуру Индии, мы должны сначала разобраться в переходе от Плановой комиссии (Planning Commission) к NITI Aayog. На протяжении десятилетий Плановая комиссия, созданная в 1950 году, была центральным игроком в распределении ресурсов. Однако она часто вступала в противоречие с Комиссией по финансам (Finance Commission). В то время как Комиссия по финансам является конституционным органом, Плановая комиссия была создана исполнительным указом и не имела конституционного статуса D. D. Basu, Introduction to the Constitution of India, Administrative Relations, p.397. Основная проблема заключалась в том, что Плановая комиссия контролировала «плановые расходы», что иногда ограничивало роль Комиссии по финансам в управлении государственным бюджетом. В 2015 году правительство заменило Плановую комиссию на NITI Aayog (Национальный институт трансформации Индии). Этот переход ознаменовал фундаментальный сдвиг в философии управления: от «сверху вниз» к подходу «снизу вверх». В отличие от своей предшественницы, NITI Aayog не обладает полномочиями по распределению средств штатам или министерствам — эта функция теперь полностью передана Министерству финансов Vivek Singh, Indian Economy, Indian Economy after 2014, p.228. Вместо этого NITI Aayog выступает в роли государственного «мозгового центра» (Think Tank), предоставляя стратегические и технические консультации и способствуя развитию кооперативного федерализма.

Характеристика	Плановая комиссия (1950–2014)	NITI Aayog (с 2015 г.)
Подход	«Сверху вниз» (Центр решает за штаты).	«Снизу вверх» (Штаты — равноправные партнеры).
Финансовые полномочия	Распределяла средства штатам и министерствам.	Не имеет полномочий по распределению средств.
Роль штатов	Ограниченная, роль «просителей» планов.	Активная (через Управляющий совет).

Создание NITI Aayog помогло устранить дублирование функций, о котором часто упоминали эксперты по государственному управлению M. Laxmikanth, Indian Polity, Centre State Relations, p.164. Теперь Комиссия по финансам остается главным конституционным органом, определяющим долю штатов в налогах, в то время как NITI Aayog фокусируется на долгосрочной политике и инновациях.

Sources: Introduction to the Constitution of India, ADMINISTRATIVE RELATIONS BETWEEN THE UNION AND THE STATES, p.397; Indian Economy, Indian Economy after 2014, p.228; Indian Polity, Centre State Relations, p.164

5. The GST Council: Modern Revenue Coordination (exam-level)

While the Finance Commission works on the division of the overall tax pool, the Goods and Services Tax (GST) Council represents a different side of fiscal federalism: co-decision making. Before the GST era, the Centre and States set their indirect taxes independently, often leading to a chaotic 'tax on tax' (cascading) effect. To fix this, the 101st Amendment Act of 2016 introduced the GST Council as a constitutional body under Article 279-A, acting as a joint forum for the Union and the States to coordinate revenue matters in a unified market Indian Polity, M. Laxmikanth, Chapter 15, p.155.

The composition of the Council is a masterclass in cooperative federalism. It is chaired by the Union Finance Minister, with the Union Minister of State for Finance and the Finance Ministers (or any nominated ministers) from every State and Union Territory with a legislature acting as members Indian Economy, Vivek Singh, Chapter 4, p.174. Unlike many other bodies where the Centre holds ultimate sway, the GST Council's voting structure ensures that neither the Centre nor the States can take a unilateral decision. The Centre holds one-third of the weighted vote, while the States combined hold two-thirds. Any decision requires a three-fourth (75%) majority, making consensus or broad agreement an absolute necessity.

The Council is not just a talking shop; its recommendatory powers are vast and binding in practice. It decides which taxes, cesses, and surcharges get merged into GST, which goods and services are exempted, and the threshold limits of turnover for businesses to enter the tax net Indian Polity, M. Laxmikanth, GST Council, p.435. Crucially, it also recommends the GST rates (the slabs of 5%, 12%, 18%, and 28%) and can suggest special rates to raise additional resources during natural calamities or disasters Indian Economy, Vivek Singh, Chapter 4, p.174. It also makes special provisions for the North-Eastern and Himalayan States to protect their unique economic interests.

Sources: Indian Polity, M. Laxmikanth, Chapter 15: Centre-State Relations, p.155; Indian Economy, Vivek Singh (7th ed. 2023-24), Chapter 4: Government Budgeting, p.174; Indian Polity, M. Laxmikanth(7th ed.), Goods and Services Tax Council, p.435

6. Article 280: Constitution of the Finance Commission (exam-level)

At the heart of India's fiscal architecture lies Article 280 of the Constitution. Think of this article as the mandatory "reset button" for India's financial relations. Because the economic needs of the Centre and the States change over time, the Constitution does not fix the tax-sharing formula permanently. Instead, it mandates the President of India to constitute a Finance Commission (FC) every five years (or earlier if necessary) to recommend how resources should be shared. This makes the FC the "balancing wheel of fiscal federalism," ensuring that while the Centre collects the bulk of the revenue, the States receive enough funds to fulfill their developmental responsibilities. Laxmikanth, M. Indian Polity, Finance Commission, p.431

The Finance Commission is described as a quasi-judicial body. This is because it doesn't just crunch numbers; it acts like a bridge between the Union and the States, hearing grievances, analyzing data, and making recommendations that carry significant constitutional weight. While the Constitution provides the framework, it leaves the specifics of composition and qualifications to the wisdom of the legislature. Specifically, the Constitution authorizes Parliament to determine the qualifications of the members and the manner in which they are selected. Laxmikanth, M. Indian Polity, Finance Commission, p.431

The structure of the Commission is precisely defined by law:

• Composition: It consists of a Chairman and four other members appointed by the President.
• Re-appointment: Members are eligible for reappointment, allowing for continuity in fiscal expertise.
• Tenure: They hold office for the period specified by the President in the appointment order.

Historically, the role of the Finance Commission was somewhat overshadowed by the Planning Commission (a non-constitutional body), but since the latter was replaced by NITI Aayog in 2015, the Finance Commission has re-emerged as the primary constitutional authority for tax revenue distribution. Vivek Singh, Indian Economy, Government Budgeting, p.182

Sources: Laxmikanth, M. Indian Polity, Finance Commission, p.431-432; Laxmikanth, M. Indian Polity, Centre-State Relations, p.156; Vivek Singh, Indian Economy, Government Budgeting, p.182

7. Mandate: Vertical and Horizontal Devolution (exam-level)

To understand the Finance Commission's work, we must look at how money flows in a federal system. In India, the Centre has a greater capacity to raise revenue (like Income Tax and GST), while States bear the heavy lifting of social expenditures (like Health and Education). This creates a 'fiscal imbalance' that the Commission corrects through two primary types of tax sharing: Vertical Devolution and Horizontal Devolution Indian Economy, Vivek Singh (7th ed. 2023-24), Chapter 4: Government Budgeting, p.182.

Vertical Devolution refers to the division of the 'net proceeds' of taxes between the Union and the States as a whole. Think of it as deciding the size of the slices for the Centre versus the States from the total tax cake. The 15th Finance Commission, for instance, recommended that 41% of the central tax pool go to the States. This process is governed by Article 270 of the Constitution, which ensures that taxes are shared according to the President's order after considering the Commission's advice Indian Polity, M. Laxmikanth(7th ed.), Chapter 15: Centre-State Relations, p.154.

Horizontal Devolution, on the other hand, is the distribution of that 41% share among the various States. This is where the Commission applies a specific formula to ensure equity. Since different States have different needs—some are more populous, some have tougher terrain, and some are more industrially developed—the Commission uses criteria like population, area, forest cover, and 'income distance' to decide how much Bihar gets compared to Tamil Nadu. This ensures that even resource-poor States have enough funds to provide basic public services to their citizens.

Feature	Vertical Devolution	Horizontal Devolution
Direction	Union to all States (Top to Bottom)	Among the States (Sideways)
Purpose	To correct the fiscal gap between Centre's revenue and States' spending.	To ensure equity so that no State is left behind due to geography or history.
Key Concept	The percentage share (e.g., 41%).	The formula-based weightage (Criteria).

It is important to remember that the Commission only deals with the 'net proceeds', which means the total tax collected minus the cost of collection. This figure must be certified by the Comptroller and Auditor-General of India (CAG) to ensure transparency Indian Polity, M. Laxmikanth(7th ed.), Chapter 15: Centre-State Relations, p.156.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Chapter 4: Government Budgeting, p.182; Indian Polity, M. Laxmikanth(7th ed.), Chapter 15: Centre-State Relations, p.154, 156

8. Solving the Original PYQ (exam-level)

Now that you have mastered the conceptual framework of Fiscal Federalism and the division of powers under the Seventh Schedule, this question serves as a direct application of Article 280 of the Indian Constitution. You have previously learned that because the Centre possesses greater revenue-raising capacity while States bear more expenditure responsibilities, a "vertical imbalance" is inherent in our system. This question tests your ability to identify the specific quasi-judicial body designed to bridge this gap through a transparent, rule-based mechanism of tax devolution.

To arrive at the correct answer, focus on the constitutional mandate: the President constitutes the Finance Commission every five years to recommend the distribution of net proceeds of taxes. When you see the phrase "distribution of revenues," your mind should immediately link it to vertical devolution (Centre to States) and horizontal devolution (among the States). As highlighted in Indian Polity by M. Laxmikanth, this commission acts as the "balancing wheel of fiscal federalism." Therefore, (B) Finance Commission is the only body with this specific constitutional authority to handle tax sharing.

Why avoid the other options? The Planning Commission (now replaced by NITI Aayog) was an executive body that historically handled discretionary plan grants but never held the constitutional authority for tax revenue distribution. The Inter-State Council (Article 263) and the National Development Council are primarily platforms for policy coordination and federal cooperation rather than fiscal arithmetic. UPSC often includes these options as traps because they are "Centre-State" bodies; however, you must distinguish between administrative coordination and fiscal distribution to select the right answer.