Article 270 of the Constitution of India: Evolution, Interpretation, and Contemporary Relevance

Article 270 of the Constitution of India: Evolution, Interpretation, and Contemporary Relevance

Introduction

Fiscal federalism in India is constitutionally engineered through Part XII, particularly Articles 268–281, which govern the distribution of taxing powers and revenues between the Union and the States. Article 270 occupies a pivotal position in this matrix by prescribing how taxes levied and collected by the Union are to be distributed. Over seven decades, successive constitutional amendments—most notably the Eightieth (2000), Eighty-eighth (2003), and One-Hundred-and-First (2016)—have transformed the provision from a narrowly-cast mechanism for sharing income-tax to a comprehensive rule for devolution of “all taxes and duties referred to in the Union List” (save only a few exclusions).

This article critically analyses the text, history, and judicial interpretation of Article 270, drawing on leading cases such as Bhagwan Dass Jain v. Union of India[1], All-India Federation of Tax Practitioners v. Union of India[2], and Union of India v. Mohit Minerals Pvt. Ltd.[3]. It also situates Article 270 within India’s broader constitutional architecture, including the distribution of legislative competences (Articles 246, 246A, 248) and the evolving doctrine of cooperative federalism articulated in State of West Bengal v. Union of India[4].

Historical Evolution of Article 270

Original Scheme (1950–1999)

The original text confined revenue sharing to taxes on income other than agricultural income. The proceeds were first credited to the Consolidated Fund of India and thereafter assigned to States based on principles recommended by the Finance Commission (Article 280). The sharing arrangement was therefore tax-specific and discretion-limited, reflecting a predominantly unitary fiscal model supplemented by periodic Finance Commissions.

Paradigm Shift under the Eightieth Amendment, 2000

Responding to fiscal needs and recommendations of the Tenth Finance Commission, the Eightieth Amendment replaced the narrow income-tax pool with a “divisible pool comprising all Union taxes and duties” except surcharges and cesses. Article 270(1) was rewritten to expand vertical devolution and to insulate State finances from volatility in any one tax base. The amendment also introduced Article 270(1-A) to deal with proceeds attributable to Union territories, thereby rationalising inter-se distribution.

Service-Tax and the Eighty-eighth Amendment, 2003

The constitutional legitimacy of service tax—upheld in All-India Federation of Tax Practitioners[2]—was constitutionally anchored by adding Article 268-A and Entry 92-C in the Union List. Notably, Article 270(1) was simultaneously amended so that “taxes on services” formed part of the divisible pool, signalling Parliament’s intent to share the growing service-tax revenue with the States.

Goods and Services Tax and the One-Hundred-and-First Amendment, 2016

The GST regime introduced Articles 246-A and 279-A, but it also modified Article 270 yet again. Sub-article (1-A)(ii) now mandates that a portion of the Integrated GST (IGST) collected by the Union shall be apportioned between the Union and the States “in the manner provided by Parliament by law”. The Supreme Court’s recent decision in Mohit Minerals[3] underscores that although GST is a concurrent tax, its revenue-sharing architecture is constitutionally entrenched in Article 270, thus preserving the balance of fiscal power while preventing double taxation through doctrinal devices such as “composite supply”.

Constitutional Structure Surrounding Article 270

Article 270 must be read in conjunction with:

  • Article 265 – No tax shall be levied or collected except by authority of law.
  • Article 268 – Duties levied by the Union but collected and appropriated by the States.
  • Article 268-A – Service tax collected and appropriated by the Union and States (pre-GST).
  • Article 271 – Power of Parliament to levy a surcharge on certain taxes for Union purposes.
  • Article 279 – Calculation of “net proceeds” to be certified by the Comptroller & Auditor General.
  • Article 279-A – GST Council’s recommendatory powers.
  • Article 280 – Finance Commission’s role in recommending distribution criteria.

Together, these provisions delineate a sophisticated framework where the Union’s plenary taxing power is tempered by mandatory revenue-sharing, thereby fostering fiscal federalism.

Judicial Interpretation and Doctrinal Themes

Nature of “Taxes” versus “Surcharges”

In CIT v. Arthusa Offshore[5], the Uttarakhand High Court held that surcharges are merely “additional taxes”, yet Article 270 expressly excludes surcharges from the divisible pool while Article 271 empowers Parliament to levy them for Union purposes. The court’s reasoning—rejecting the taxpayer’s reliance on Article 270 to deny surcharge liability—demonstrates that Article 270 governs distribution, not the incidence of tax.

States’ Stake in Union Taxation

In C.N. Bros. v. CIT[6], the Gujarat High Court upheld differential court-fee treatment for the Revenue, noting that States are “vitally interested in income-tax” via Article 270. The decision underscores that Article 270 creates a direct fiscal stake for States in Union tax administration, thereby justifying procedural privileges accorded to revenue authorities.

Definition of “Income” and the Article 270 Context

The Supreme Court in Bhagwan Dass Jain[1] adopted a wide interpretation of “income” in Entry 82 (Union List) partly by reference to Article 270(1), reasoning that the Constituent Assembly must have intended the same conceptual reach for the term in both contexts. This interpretive cross-pollination exemplifies how Article 270 operates as a contextual aid for construing taxing entries and statutes.

Service-Tax as a Shareable Levy

The All-India Federation judgment predates GST but affirmed that service-tax is “value-added tax on consumption” falling under Entry 97 (residuary). Post-88th Amendment, such taxes clearly enter the Article 270 pool, evidencing the Court’s foresight in aligning constitutional doctrine with evolving fiscal policy.

GST and the Principle of Cooperative Federalism

In Mohit Minerals[3], the Supreme Court invalidated a Union notification imposing IGST on ocean freight, holding that the levy offended the GST’s “composite supply” scheme. While the case centred on Article 246-A and statutory provisions, the Court referenced Article 270(1-A) to emphasise that shared revenue must correspond to legitimately imposed tax. Thus, Article 270 also functions as a constitutional safeguard against fiscal overreach.

Interplay with Legislative Competence

The Constitution Bench in State of West Bengal v. Union of India[4] upheld Parliament’s power to acquire State-owned coal-bearing lands under Entry 42, List III, stressing that Union action serving national interests may validly impinge upon State resources. Although the case did not apply Article 270, its reasoning on federal balance is analogous: just as legislative power can override State property interests when constitutionally warranted, Union taxation powers are subjected to compulsory revenue-sharing to preserve that balance.

Contemporary Challenges and Policy Considerations

Vertical and Horizontal Equity

After the Eightieth Amendment, the divisible pool’s expansion increased vertical devolution but also magnified disparities among States. The Finance Commission’s horizontal formulae—population, income distance, area, forest cover, etc.—attempt to address this, yet debates persist over adequacy and incentivisation.

Surcharges and Cesses as “Back-door Centralisation”

Because surcharges and earmarked cesses are excluded from Article 270, their proliferating use potentially erodes the divisible pool. Critics argue that this trend undermines cooperative federalism by shrinking States’ share despite buoyant Union revenues. The constitutional text permits such exclusions, but a purposive reading aimed at fiscal equity might counsel restraint or parliamentary self-regulation.

GST Revenue Shortfalls

The GST compensation mechanism—rooted in statute rather than Article 270—expires in 2026. Given the integrated nature of Article 270(1-A) and GST revenues, a constitutional or legislative recalibration may be imperative to secure State finances against post-compensation uncertainties.

Need for Greater Transparency

Article 279 mandates certification of “net proceeds” by the C&AG, but granular data on cess collections and surcharge proceeds remain opaque. Legislative oversight and judicial review could invoke Article 270’s distributive mandate to demand enhanced transparency.

Conclusion

Article 270 has evolved from a modest sharing rule for income-tax to a comprehensive cornerstone of Indian fiscal federalism. Judicial decisions—spanning taxation, legislative competence, and federal disputes—reflect and reinforce this evolution by interpreting taxation powers through the prism of revenue sharing and cooperative federalism. While constitutional architecture provides robust mechanisms for vertical devolution, emerging challenges such as the proliferation of surcharges, GST revenue volatility, and demands for horizontal equity necessitate vigilant constitutional and legislative stewardship. Ultimately, the vitality of Article 270 lies in its capacity to adapt to India’s dynamic economic landscape while preserving the federal compact envisioned by the framers.

Footnotes

  1. Bhagwan Dass Jain v. Union of India, (1981) 2 SCC 135.
  2. All-India Federation of Tax Practitioners v. Union of India, (2007) 7 SCC 527.
  3. Union of India v. Mohit Minerals Pvt. Ltd., 2022 SCC OnLine SC 657.
  4. State of West Bengal v. Union of India, AIR 1963 SC 1241.
  5. Commissioner of Income-Tax v. Arthusa Offshore Co., (2008) 302 ITR 9 (Uttaranchal).
  6. C.N. Bros. v. Commissioner of Income-Tax, 1961 SCC OnLine Guj 6.