The taxation system is the backbone of a country's economy, ensuring that revenue is stable, that economic growth is managed, and that industrial activity is fueled. Article 268 deals with certain taxes which are levied by the central government but are collected and claimed by the state government.

Taxes Levied by the Centre but Collected and Appropriated by the States - Constitutional Provisions

• Article 268 specifies the duties imposed by the Union government but collected and claimed by the states, such as stamp duties and excise on medicinal and toilet treatments, despite the fact that they are listed in the Union List.
• It includes stamp charges levied by the Indian government on bills of exchange, checks, and promissory notes.
• These taxes are not included in the Consolidated Fund of India and are appropriated by the same state in which they were levied, therefore they do not contribute to it.
• The fund will be allotted to the Government of India in the case of Union territories.
• According to Article 268, because the items of taxation are a part of the union list, the central government has sole authority over the levying and appropriation of these duties.

Conclusion

• The Indian states have regularly expressed their worry that the centre is not allowing the states to fully harness the taxing resources described in Articles 268 and 269 of the Constitution.
• Particularly with regard to letters of credit, bills of lading, and general insurance policies, which results in governments' tax resources and development being limited.
• Experts have suggested that the scope for raising more resources under Articles 268 and 269 should be revisited.

FAQs

MCQs

1. What does Article 268 of the Indian Constitution relate to?

A) Taxes levied and collected by the Centre
B) Taxes levied by the Centre but collected and appropriated by the states
C) Taxes levied and collected by the states
D) Distribution of taxes between Centre and states

2. Which of the following is an example of a tax under Article 268?

A) Income Tax
B) Central Excise Duty
C) Stamp Duty on bills of exchange
D) GST

3. What is the main purpose of allowing states to collect taxes levied by the Centre under Article 268?

A) To centralize financial power
B) To provide additional revenue to states
C) To avoid tax collection by states
D) To reduce the Centre’s administrative workload

4. Who has the legislative authority over taxes mentioned in Article 268?

A) State Legislatures
B) Parliament
C) Finance Commission
D) GST Council

5. How are the revenues from taxes under Article 268 distributed?

A) Shared equally between Centre and states
B) Retained by the Centre
C) Collected and appropriated by states
D) Transferred to the Consolidated Fund of India

GS Mains Questions and Model Answers

Q1: Discuss the significance of Article 268 in the Indian Constitution. How does it impact the financial relations between the Centre and states?

Answer: Article 268 of the Indian Constitution plays a critical role in defining the financial relationship between the Centre and the states. By allowing taxes to be legislated by the Centre but collected and appropriated by the states, it ensures that states receive a share of revenue without compromising uniform legislation. This provision supports fiscal federalism by empowering states to manage their finances while adhering to central tax laws. The allocation of revenue from duties like stamp duty on certain transactions provides states with additional funds for their development and economic management. This arrangement strengthens the cooperative structure of federal governance and balances the distribution of financial power.

Q2: Evaluate the role of Article 268 in supporting fiscal federalism in India. What challenges and benefits does it present?

Answer: Article 268 supports fiscal federalism by allowing states to collect and appropriate certain taxes levied by the Centre. This arrangement ensures that states have additional sources of revenue, fostering economic development and financial independence. The benefits include greater autonomy for states to utilize resources without direct control by the Centre, which helps address local needs efficiently. However, challenges include potential disparities in revenue generation among states, as wealthier regions may benefit more from such taxes compared to poorer ones. Ensuring equitable distribution and addressing such disparities through fiscal transfers or grants is crucial to maintain balance and support weaker states.

Q3: How does Article 268 embody the principle of cooperative federalism in the Indian context? Illustrate with examples.

Answer: Article 268 exemplifies cooperative federalism by integrating the legislative power of the Centre with the fiscal benefits for states. This cooperative mechanism allows for uniform tax laws across the country while enabling states to collect revenue for local development. For instance, stamp duties on financial instruments like bills of exchange and transfer of shares are legislated centrally but collected by the states. This model supports a balanced distribution of financial power, ensuring states have access to revenue without legislative fragmentation. Such an approach reinforces collaboration between the Centre and states, ensuring a shared responsibility for economic growth and governance.

Previous Year Questions on Article 268

1. UPSC CSE Prelims 2022:

Question: Which Article of the Indian Constitution deals with taxes levied by the Centre but collected and appropriated by the states?

A) Article 266
B) Article 268
C) Article 270
D) Article 275

Answer: (B)

Explanation: Article 268 deals with taxes that are legislated by the Centre but collected and appropriated by the states, contributing to state revenue without appropriation by the Centre.

2. UPSC CSE Mains 2020 (GS Paper 2):

Question: "Examine the significance of Article 268 in the financial distribution system between the Centre and states. How does it reflect the principles of fiscal federalism?"

Answer: Article 268 reflects the principles of fiscal federalism by allowing states to collect and appropriate revenue from certain taxes legislated by the Centre. This provision enhances the financial capabilities of states, giving them the resources to manage local needs while maintaining uniform tax legislation across India. It embodies the spirit of cooperative federalism, where the Centre and states share responsibilities. The revenue collected from duties, such as stamp duties, supports the states’ financial autonomy. Challenges, however, include the uneven distribution of revenue potential among states, which may require compensatory mechanisms to balance regional disparities.

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