When Exceptions Swallow The Rule: Cesses, Surcharges, And The Erosion Of The Divisible Pool
Aditi Jain, Institute of Law, Nirma University
ABSTRACT
India's constitutional framework establishes fiscal federalism to create partnership-based financial cooperation between national and state governments through the Finance Commission's tax distribution system. The current fiscal operations of India show evidence that the country has moved away from its original constitutional framework. The study investigates how Union government budgetary practices of using cesses and surcharges have affected Constitution-based fiscal distribution methods which use Article 270 to operate.
The research study investigates three main research questions which are defined as follows: (i) How has the expanded use of cesses and surcharges affected the constitutionally mandated tax-sharing framework between the Union and the States? (ii) Does the exclusion of cesses and surcharges from the divisible pool under Article 270 undermine the principles of fiscal federalism? (iii) What are the constitutional and legal implications of this practice in light of the Basic Structure Doctrine?
The research employs both doctrinal research methods and empirical research methods for its investigation. The study uses constitutional laws together with Finance Commission reports, Comptroller and Auditor General (CAG) reports, judicial precedents and fiscal data to show how revenue streams and their distribution have changed through time. The study examines the Goods and Services Tax (GST) Compensation Cesses through a case study which focuses on its effectiveness during the COVID-19 pandemic to demonstrate how centralized fiscal systems affect real-world outcomes.
The research paper shows that cesses and surcharges receive constitutional authorization yet their increasing share in total tax revenue leads to a diminished pool of revenue sharing which restricts states' financial independence. The study maintains that these instruments create an ongoing system of "backdoor centralization" which disrupts cooperative federalism while violating federalism principles established in S.R. Bommai v. Union of India. Uncontrolled financial centralization creates major dangers to India's federal system which needs judicial examination and institutional changes to restore constitutional order according to the study's findings.
