Consider the following statements: In India, stamp duties on financial transactions are 1. levied and collected by the State Government 2. appropriated by the Union Government. Which of these statements is/are correct?

1. Constitutional Basis of Fiscal Federalism (basic)

To understand how money flows in India, we must first look at the 'Power of the Purse.' In a federal system, both the Centre and the States need independent sources of revenue to perform their duties. The Constitutional Basis of Fiscal Federalism is primarily found in Part XII (Articles 264 to 300), which outlines how financial resources are distributed between the Union and the States Indian Polity, Centre-State Relations, p.152. This ensures that neither level of government is entirely dependent on the other, maintaining the federal balance. At the very root of Indian taxation is Article 265, which acts as a shield for citizens. It states that "no tax shall be levied or collected except by authority of law" Introduction to the Constitution of India, FUNDAMENTAL RIGHTS AND FUNDAMENTAL DUTIES, p.95. This means the government cannot just demand a tax through an executive order or a simple notice; it must pass a law in the Parliament or the State Legislature first. This principle prevents arbitrary taxation and ensures that the people's representatives have the final say on how much the public is taxed. The actual division of these taxing powers is found in the Seventh Schedule of the Constitution. Think of this as a ledger with three columns:

• Union List (List I): Contains subjects where only the Centre can levy taxes (e.g., Income Tax, Customs duties). It currently has 98 subjects Indian Polity, Federal System, p.139.
• State List (List II): Contains subjects where only the States have the power (e.g., Land Revenue, Excise duty on alcohol). It currently has 59 subjects.
• Concurrent List (List III): While both can make laws here, the Constitution generally avoids giving both levels the power to tax the same subject to prevent double taxation.

Any subject not mentioned in these lists (Residuary power) belongs to the Centre Indian Polity, Federal System, p.139.

Sources: Indian Polity, Centre-State Relations, p.152; Introduction to the Constitution of India, FUNDAMENTAL RIGHTS AND FUNDAMENTAL DUTIES, p.95; Indian Polity, Federal System, p.139

2. Understanding Tax Terminology: Levy, Collection, and Appropriation (basic)

In the world of Indian taxation, a tax isn't just a single event; it is a process involving three distinct stages. To understand how the Centre and States share money, we must first distinguish between Levy, Collection, and Appropriation. In many countries, the authority that creates the tax also gathers the money and keeps it. However, the Indian Constitution makes a sharp distinction between the legislative power to impose a tax and the power to enjoy its proceeds Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.384.

Let's break down these three pillars:

• Levy: This is the legislative stage. It refers to the legal authority to impose a tax. Under the Seventh Schedule, the Constitution assigns specific 'entries' to the Union and State lists. Only the authority with the legislative power over a subject can 'levy' a tax on it. For example, the Union levies Income Tax, while States levy Land Revenue.
• Collection: This is the administrative stage. It refers to the physical act of gathering the tax from the citizen. While usually the levying authority also collects the tax, the Constitution allows for scenarios where the Union levies a tax but the State machinery actually collects it from the people.
• Appropriation: This is the utilization stage. It refers to who gets to keep the money and spend it. In some cases, the Union may levy and collect a tax but must then hand over the entire proceeds to the States. In such a scenario, the States 'appropriate' the revenue Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.385.

A classic example of this separation is found in Article 268. For certain items like stamp duties on bills of exchange or insurance policies, the Union levies the duty (to ensure uniform rates across India), but the States collect and appropriate the money. This means the money never even enters the Consolidated Fund of India; it stays directly with the States to fund their local welfare and development Indian Polity, Centre-State Relations, p.153.

Term	Core Meaning	Nature of Power
Levy	The authority to impose the tax by law.	Legislative
Collection	The act of gathering the tax money.	Administrative
Appropriation	The right to keep and spend the proceeds.	Financial/Fiscal

Sources: Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.384-385; Indian Polity, Centre-State Relations, p.153

3. The Role of the Finance Commission (intermediate)

In a federal structure like India, there is often a mismatch between the powers of the Union to raise revenue and the extensive welfare responsibilities of the States. To bridge this gap and ensure fiscal federalism, the Constitution provides for a Finance Commission (FC) under Article 280. Think of it as the 'balancing wheel' of India’s financial architecture. It is a quasi-judicial body constituted by the President every five years (or earlier) to recommend how financial resources should be shared between the Union and the States M. Laxmikanth, Indian Polity, Chapter 46, p.433.

The core role of the Finance Commission revolves around three primary recommendations:

• Vertical Devolution: Determining what percentage of the 'divisible pool' of central taxes should be given to the States as a whole. For instance, the 15th Finance Commission recommended a 41% share for the States Vivek Singh, Indian Economy, Chapter 10, p.182.
• Horizontal Devolution: Deciding how that 41% should be divided among the different States based on criteria like population, income distance, and forest cover Nitin Singhania, Indian Tax Structure and Public Finance, p.123.
• Grants-in-Aid: Formulating principles for providing financial assistance to States in need of extra support under Article 275.

Interestingly, the 73rd and 74th Amendment Acts added a new dimension to its role. The Commission must now also suggest measures to augment the Consolidated Fund of a State. This is done to supplement the resources of local bodies like Panchayats and Municipalities, based on the recommendations made by the respective State Finance Commissions D. D. Basu, Introduction to the Constitution of India, Part IXA, p.326.

Feature	Vertical Devolution	Horizontal Devolution
Definition	Sharing of resources between the Centre and the States.	Sharing of resources among the various States.
Current Status	Set at 41% of the divisible pool.	Based on a formula (Area, Population, Ecology, etc.).

It is important to remember that the recommendations of the Finance Commission are advisory in nature. While the government usually accepts them, there is no legal obligation to implement every suggestion D. D. Basu, Introduction to the Constitution of India, Part XII, p.387.

Sources: Indian Polity, M. Laxmikanth, Chapter 46: Finance Commission, p.433; Introduction to the Constitution of India, D. D. Basu, Part XII: Distribution of Financial Powers, p.387; Introduction to the Constitution of India, D. D. Basu, Part IXA: Municipalities and Planning Committees, p.326; Indian Economy, Vivek Singh, Chapter 10: Government Budgeting, p.182; Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.123

4. The GST Framework and 101st Amendment (intermediate)

To understand the Goods and Services Tax (GST), we must first look at the 'siloed' nature of taxation that existed before 2017. Historically, the Union had the power to tax the manufacture of goods (Excise Duty) and the provision of services, while the States had the power to tax the sale of goods (VAT/Sales Tax). Because these powers were mutually exclusive, neither could implement a single, unified tax on both goods and services. The 101st Constitutional Amendment Act, 2016, was the 'key' that unlocked this barrier, fundamentally altering the distribution of financial powers in our federal structure Indian Polity, M. Laxmikanth (7th ed.), Centre-State Relations, p.153.

The crown jewel of this amendment is Article 246A. This unique provision grants simultaneous power to both Parliament and State Legislatures to make laws regarding GST. This was a massive departure from the traditional Seventh Schedule logic, where a subject usually belongs to either the Union List or the State List. Under Article 246A, for any intra-state supply (within a state), both the Centre and the State levy tax (CGST and SGST) concurrently Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.83.

To ensure this 'dual-engine' system doesn't result in chaos, the amendment also inserted Article 279A, which empowered the President to constitute the GST Council. This Council acts as the supreme decision-making body for GST rates, exemptions, and thresholds. Unlike traditional indirect taxes like Customs Duty, where the Parliament must pass a Finance Act to raise rates beyond a specified ceiling, GST rates are determined by the Council's consensus and then implemented via gazette notifications Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.149.

Sources: Indian Polity, M. Laxmikanth (7th ed.), Centre-State Relations, p.153; Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.83; Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.149; Introduction to the Constitution of India, D. D. Basu (26th ed.), DISTRIBUTION OF FINANCIAL POWERS, p.392

5. Grants-in-Aid and Non-Tax Revenue (intermediate)

In our journey through financial relations, we've seen how taxes are divided. However, taxes alone often aren't enough to meet the developmental needs of States. To bridge this gap, the Constitution provides for Grants-in-Aid. These are essentially transfers from the Centre to the States to ensure horizontal equity (helping poorer states catch up) and vertical balance. There are two primary types of grants you must distinguish: Statutory Grants and Discretionary Grants.

Statutory Grants are governed by Article 275. These are charged on the Consolidated Fund of India and are given to states in need of assistance. Not every state receives them; the amounts are determined based on the recommendations of the Finance Commission Laxmikanth, M. Indian Polity, Centre-State Relations, p.155. On the other hand, Discretionary Grants under Article 282 allow both the Centre and States to make grants for any "public purpose," even if the subject isn't within their direct legislative reach. These are optional and give the Centre flexibility to influence state action for national planning Laxmikanth, M. Indian Polity, Centre-State Relations, p.155.

Apart from grants, both levels of government earn Non-Tax Revenue from the services they provide. Think of this as the government acting as a business owner or a service provider. The Union earns significantly from Railways, Posts and Telegraphs, Banking, and Currency D. D. Basu, Introduction to the Constitution of India, Distribution of Financial Powers, p.386. States, meanwhile, derive income from local resources like Forests, Fisheries, and Irrigation, as well as Escheat (property belonging to someone who dies without an heir) Laxmikanth, M. Indian Polity, Centre-State Relations, p.155.

Feature	Statutory Grants (Art. 275)	Discretionary Grants (Art. 282)
Nature	Mandatory if the state is in need.	Optional; at the discretion of the Centre.
Basis	Recommendations of the Finance Commission.	Originally used for Five-Year Plans; now for various schemes.
Purpose	General or specific financial assistance.	To help states fulfill plan targets or public purposes.

Sources: Laxmikanth, M. Indian Polity, Centre-State Relations, p.155; D. D. Basu, Introduction to the Constitution of India, Distribution of Financial Powers, p.386

6. Special Tax Categories: Articles 268, 269, and 269A (exam-level)

To understand the distribution of financial resources in India, we must distinguish between three distinct actions: levying (imposing the tax), collecting (physically gathering the money), and appropriating (keeping and spending the revenue). The Constitution uses these categories to balance the Union's need for uniform tax rates across the country with the States' need for financial autonomy.

Article 268 covers duties that are levied by the Union but collected and appropriated by the States. The primary examples here are stamp duties on financial instruments like bills of exchange, cheques, promissory notes, and transfer of shares. While the Union sets a uniform rate to ensure business consistency across India, the money never enters the Consolidated Fund of India. Instead, it is collected by the state where the duty is leviable and remains with that state D. D. Basu, Introduction to the Constitution of India, Distribution of Financial Powers, p.386.

Article 269 deals with taxes that are both levied and collected by the Union, but assigned to the States. This currently applies to taxes on the sale or purchase of goods (other than newspapers) and the consignment of goods in the course of inter-state trade or commerce. The Union manages the collection to prevent administrative chaos between states, but the proceeds are handed over to the states based on principles formulated by Parliament M. Laxmikanth, Indian Polity, Centre-State Relations, p.153.

With the 101st Amendment Act, Article 269A was introduced to govern the Goods and Services Tax (GST) on inter-state trade. Under this article, the Integrated GST (IGST) is levied and collected by the Union, but the proceeds are apportioned between the Union and the States based on the recommendations of the GST Council. This ensures that in a destination-based tax system, the revenue reaches the consuming state while maintaining a unified national market.

Article	Levied By	Collected By	Kept/Appropriated By
268	Union	States	States
269	Union	Union	States (Assigned)
269A	Union	Union	Shared (Union & States)

Sources: Introduction to the Constitution of India, Distribution of Financial Powers, p.385-386; Indian Polity, Centre-State Relations, p.153

7. The Specifics of Stamp Duties in India (exam-level)

In the complex landscape of Indian fiscal federalism, Stamp Duties occupy a unique middle ground. To understand them, we must distinguish between two categories: those where the Union sets the rules to ensure commercial uniformity, and those where States have full autonomy. The root of this distinction lies in the need for a seamless national economy; for instance, a Bill of Exchange or a Transfer of Shares should ideally be taxed at the same rate whether the transaction happens in Mumbai or Chennai to avoid market distortions.

Under Article 268 of the Constitution, a specific set of instruments is levied by the Union but collected and appropriated by the States. This means the Parliament determines the rate of tax (the levy), but the actual money is gathered by the State government where the document is executed, and that State keeps the entire revenue. These proceeds do not enter the Consolidated Fund of India; they are assigned directly to the states M. Laxmikanth, Indian Polity, Chapter 15, p.153. The specific documents under this Union-levied category include:

• Bills of Exchange and Promissory Notes
• Cheques
• Policies of Insurance
• Transfer of Shares

However, for most other legal documents—such as property sale deeds, agreements, or powers of attorney—the power lies entirely with the States. For these "non-Union List" documents, the State government both levies the tax and collects it. This explains why the cost of buying a house (stamp duty + registration fees) varies significantly from one state to another Nitin Singhania, Indian Economy, Indian Tax Structure, p.96. While the Indian Stamp Act of 1899 provides a framework, many states have enacted their own Stamp Acts to regulate these local transactions D. D. Basu, Introduction to the Constitution of India, Distribution of Financial Powers, p.386.

To keep this clear, think of it as a division of labor vs. total control:

Feature	Union List Instruments (Art. 268)	State List Instruments
Examples	Shares, Insurance, Bills of Exchange	Property Sales, Bonds, Land Deeds
Who fixes the rate?	Union Government	State Government
Who gets the money?	State Government	State Government

Sources: Indian Polity, Centre-State Relations, p.153; Indian Economy, Indian Tax Structure and Public Finance, p.96; Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.386

8. Solving the Original PYQ (exam-level)

This question brings together the building blocks of Center-State Financial Relations that you have just studied. Specifically, it tests your precision regarding Article 268 of the Constitution, which governs duties levied by the Union but collected and appropriated by the States. While the Union Government has the power to determine the rate of stamp duties on specific financial instruments (like bills of exchange and transfer of shares) to ensure uniformity across the country, the administrative and fiscal benefit belongs to the States. As a student of Laxmikanth, M. Indian Polity, you should recognize this as a classic example of decentralized fiscal management within a federal structure.

To arrive at the correct answer, you must apply the tripartite test: Who levies? Who collects? Who appropriates? According to the Constitution, these stamp duties are levied by the Union, but they are collected and appropriated by the States. Therefore, Statement 1 is incorrect because the State does not levy these duties; the Union does. Statement 2 is also incorrect because the Union does not keep the money (appropriate it); the States do. Since both statements misrepresent the distribution of power, the correct choice is (D) Neither 1 nor 2.

UPSC frequently uses the "Keyword Swap" trap to catch candidates who have a general idea but lack precise clarity. By swapping the roles of the Union and the States, the examiner tests whether you understand that these revenues do not form part of the Consolidated Fund of India, but are assigned directly to the States. Common traps in such questions include confusing Article 268 with Article 269 (levied and collected by the Union but assigned to States) or assuming that if the Union levies a tax, it must also collect it. Always remember: in the Indian fiscal federalism model, the authority to tax and the right to the proceeds are often decoupled.