Model Answer

India's Constitution divides taxation powers between the Centre and States to ensure financial autonomy. The Supreme Court's 2026 ruling on State cesses reinforces the principle of fiscal federalism.

Division of Taxation Powers

1. Constitutional division under Article 246 and the Seventh Schedule defines legislative competence.
2. Union taxation includes income tax (except agricultural income), customs duties and corporation tax.
3. State taxation includes agricultural income tax, land revenue and taxes on specified petroleum products.
4. GST framework under Article 246A grants concurrent taxing powers over GST, with special provisions for inter-State supplies.
5. Revenue sharing under Article 270 distributes divisible Union taxes between the Centre and States.
6. State cesses may supplement taxes within State competence. e.g: Supreme Court's 2026 ruling reaffirming S. Kodar (1975).

Challenges to Fiscal Federalism

1. Vertical imbalance arises from States' expenditure responsibilities exceeding their revenue powers.
2. Cesses and surcharges reduce the divisible tax pool. e.g: Union cesses excluded from Finance Commission devolution.
3. GST dependence limits independent State taxation choices.
4. Revenue disparities create unequal fiscal capacities across States.
5. Borrowing restrictions constrain States' financial flexibility. e.g: Article 293.

Way Forward

1. Strengthen GST Council through cooperative decision-making.
2. Improve tax devolution by reviewing excessive reliance on Union cesses and surcharges.
3. Enhance State revenues through property tax reforms and better compliance.
4. Ensure predictable transfers through transparent and timely fiscal allocations.

Strong fiscal federalism requires constitutional clarity, equitable revenue sharing and sufficient financial autonomy for States.