Article 270 and the Divisible Pool

The divisible pool is the part of the Centre's tax money that must be shared with the states. The Centre collects big taxes like income tax, corporation tax and Central GST. But it does not keep all of this money. Article 270 of the Constitution says these taxes are to be divided between the Centre and the states. The pot of money that gets divided is called the divisible pool, and the states' share of it is called tax devolution.

Why does India need a divisible pool?

The Constitution gives the Centre the most productive taxes, like income tax and customs duty, because these are easier to collect for the whole country at once. But the states do most of the spending that touches daily life: police, hospitals, schools, farming support and local roads. So the Centre has more money and the states have more work.

Experts call this gap a vertical fiscal imbalance. The divisible pool is the main way to fix it. Without it, many states would not be able to pay salaries or run basic services.

What does the Constitution say about who collects and who keeps a tax?

Part XII of the Constitution (Articles 268 to 293) deals with finance. It sorts central taxes into groups based on who levies (imposes) the tax, who collects it and who keeps the money:

• Article 268: Some duties are imposed by the Union but collected and kept by the states. Example: stamp duties on bills of exchange, cheques and promissory notes.
• Article 269: Taxes on the sale or purchase of goods in inter-state trade (other than newspapers) and on inter-state consignment of goods are imposed and collected by the Union, but the money is given fully to the states.
• Article 269A: Integrated GST (IGST) on inter-state supplies is collected by the Union and then split between the Union and the states as the GST Council recommends and Parliament decides.
• Article 270: All other taxes and duties in the Union List are imposed and collected by the Union and then shared between the Union and the states. This is the divisible pool.
• Article 271: Parliament can add a surcharge on certain central taxes "for the purposes of the Union". The whole surcharge stays with the Centre.

What is kept out of the pool?

Article 270(1) itself says two things are not shared:

• Surcharges under Article 271 (for example, the extra surcharge on very high incomes).
• Cesses levied by Parliament for a specific purpose (for example, a health and education cess, or the Agriculture Infrastructure and Development Cess).

The pool is also counted on a net basis. Article 279 says "net proceeds" means the tax collected minus the cost of collecting it. The Comptroller and Auditor General (CAG) certifies the net proceeds, and that certificate is final.

Where did this system come from?

The 1950 Constitution was more limited. Earlier, only income tax had to be shared (old Article 270). Union excise duties could be shared if Parliament made a law for it (old Article 272). All other central taxes, such as customs duty and corporation tax, stayed with the Centre. This made states demand a share in the fast-growing taxes too.

• The Tenth Finance Commission (report for 1995-2000) suggested an "alternative scheme of devolution": put almost all central taxes into one common pool and share a fixed percentage.
• Parliament accepted this through the Constitution (Eightieth Amendment) Act, 2000. It replaced Article 270 and removed Article 272. From then on, all central taxes in the Union List (except surcharges and cesses) became shareable. The amendment applied from 1 April 1996.
• The Constitution (One Hundred and First Amendment) Act, 2016, which brought in GST, added Article 270(1A). It says the Central GST collected by the Union is also shared through the divisible pool. It also changed Article 271, so Parliament cannot put a surcharge on GST.

How does the sharing work, step by step?

1. The Centre collects all its taxes. This total is called gross tax revenue.
2. It removes the surcharges, cesses and the cost of collection. Some taxes that belong to Union Territories without a legislature are also not shared with states. What is left is the divisible pool.
3. The Finance Commission (Article 280) recommends what share of this pool goes to all states together. This is vertical devolution. The 16th Finance Commission kept it at 41% for 2026-31.
4. The Finance Commission also gives a formula to divide that 41% among the states. This is horizontal devolution. It uses things like population, area, forest cover and how far a state's income is below the richest states.
5. The Union Government pays each state its share in 14 instalments during a financial year. By norm, there is one instalment a month for the first 11 months, and 3 instalments in March. The Ministry of Finance can also release an advance or additional instalment when states need cash, for example to spend more on projects. This only brings the money forward. It does not raise a state's total share for the year, and the extra amount is adjusted against later instalments.

A simple way to picture it: think of a joint family where the eldest brother earns most of the salary. Before spending, he keeps aside some money "for special purposes" that he does not share (cesses and surcharges). The rest goes into a family pot. A fixed share of the pot (41%) goes to the younger brothers, who run the household, and an agreed formula decides how much each brother gets.

How has the states' share changed?

• 13th Finance Commission (2010-15): 32%
• 14th Finance Commission (2015-20): 42%
• 15th Finance Commission (2020-26): 41% (the 1% drop reflected the new Union Territories of Jammu & Kashmir and Ladakh, which no longer get a state share)
• 16th Finance Commission (2026-31): 41%, kept the same

Devolution vs grants: what is the difference?

Tax devolution is untied money. A state can spend it on anything it chooses. Grants-in-aid under Article 275 are paid to states that need help, and some grants come with conditions on how they are used. Money for centrally sponsored schemes is also tied to specific programmes. So, for a state, devolution is the most flexible money it gets.

Commonly confused concepts

• Article 270 vs Article 280: Article 270 says the divisible pool must be shared. Article 280 creates the Finance Commission, which recommends how much is shared and how it is divided among states.
• Cess vs surcharge: A cess is a tax raised for a named purpose (like education or roads), and the money is supposed to be used for that purpose. A surcharge is a "tax on a tax" (an extra percentage on an existing tax like income tax) under Article 271, with no fixed purpose. Both stay fully with the Centre.
• Gross tax revenue vs divisible pool: Gross tax revenue is everything the Centre collects. The divisible pool is smaller, because cesses, surcharges and collection costs are removed. So 41% of the divisible pool is much less than 41% of gross tax revenue.
• Article 269 vs Article 270: Under Article 269, the states get the whole tax. Under Article 270, the tax is shared.
• Vertical vs horizontal devolution: Vertical is the Centre-vs-all-states split (41%). Horizontal is how that 41% is divided among the states.

Issues, criticism and the way forward

• Rising cesses and surcharges: Because cesses and surcharges are not shared, a bigger share of them shrinks the pool that states get. Estimates suggest they rose from roughly 5-7% of gross tax revenue in the mid-2010s to about 13-18% in the early 2020s. Some estimates say the "41%" share works out to only about 30-32% of gross tax revenue in recent years.
• States want more: Many states asked the 16th Finance Commission to raise the share to about 50%. The Commission kept it at 41%.
• Cesses used late or for other purposes: The CAG has in the past pointed out that some cess money was not fully moved to the funds it was meant for.
• Predictability: States plan budgets on expected devolution. If central collections fall short, states' receipts also fall, which can hurt their spending plans.
• Way forward suggested by experts: Merge long-running cesses and surcharges into regular tax rates, so that they enter the divisible pool; put a limit on how much of gross revenue can come from cesses and surcharges; and give states clearer advance schedules of instalments.

Concepts to Know

• Levy: To impose a tax by law. "Levied by the Union" means Parliament's law creates the tax.
• Union List: List I of the Seventh Schedule of the Constitution. It names the subjects, including taxes, on which only Parliament can make laws.
• Vertical fiscal imbalance: The gap that arises when one level of government (here, the Centre) raises more money than it spends, while the other level (the states) spends more than it raises.
• Capital expenditure: Spending that creates long-lasting assets, like a bridge or a hospital building. It is different from revenue expenditure such as salaries and interest payments.
• Net proceeds: The money left from a tax after subtracting the cost of collecting it (Article 279).
• Comptroller and Auditor General (CAG): The constitutional authority (Article 148) that audits government accounts.