Blog Symposium on Law & Political Economy after COVID

Union Territories or Union’s Territories – A Tryst with the Finance Commission

Tejas Popat*

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This is the first post in the series of three posts on federalism after Covid. Find the second and third posts here and here.

With the pandemic having ripple effects on the fiscal stability of the country, the Finance Commission – the primary body tasked with the working of Indian fiscal federalism has an uphill battle. Art. 280 of the Constitution requires the Finance Commission to suitably reapportion the country’s revenue between “Union” and the “States.” Till to date, Union Territories have not been included in this exercise of redistributing the republic’s finances. Instead, they are assumed to be included within the Centres share. However, after the 15th Finance Commission’s Terms of Reference, Union Territories with legislatures (hereinafter ‘Union Territories’) stand excluded. In this context, I argue that their rightful status is to be treated at par with States under the Constitution.

Understanding Union Territories

Union Territories came into being with the Seventh Constitutional Amendment in 1956 because of “vital strategic or other considerations” where people were to act in an “advisory” rather than “directive” capacity. Over time some of them got their own legislatures, and democracy gained primacy. Others continued to operate under the shadow of the Central Government solely through a Lieutenant Governor.

With the Seventh Amendment, the constitutional text was only selectively amended to reflect the inclusion of Union Territories within the federal scheme. Art. 280 remained unaltered and therefore, regardless of the changes in the form of administration, it was understood that Union Territories are not ‘States’ under Art. 280 and therefore must remain outside the purview of the Finance Commission.

Interpreting” States” as Union Territories

Instead of amending the Constitution, an amendment was made to §3(58) of the General Clauses Act which defined the word “State.” In its scheme, the GCA applies only to Central statutes and regulations. The Constitution falls in neither of the two categories. Hence, the Constitution itself had to make provision for this by making the GCA applicable to its interpretation rather than the GCA applying its own provisions to the Constitution. Art. 367(1) does this job and makes the GCA applicable to the interpretation of the Constitution and by extension, the definition of “States” in §3(58). As a result, after the Seventh Amendment, in the Constitution, the word “State” would include Union Territories if there was no repugnancy in such an interpretation.

I argue that that to treat Union Territories at par with the States is not only congruous with the constitutional intent but also necessary if they are to be an integral part of our federation. Here, precedents require us to understand the implications arising from the inclusion of the definition in the constitutional text and whether it comports with the scheme of the particular provision.

Let us first assess the status of Union Territories in greater detail. Union Territories as we saw earlier, were territories without any direct democracy. With time, however, legislatures came to be set up in UTs. Thereby, in these territories, the administration becomes accountable to its people. And, despite strategic or other considerations, the Parliament recognized that democracy in these places must operate to the fullest extent allowing people to elect its legislators. What remained limited was the extent of the legislature’s sovereignty. They could legislate on limited subjects, striking a balance with the strategic considerations on the basis of which they continued to be Union Territories. These changes brought about increased accountability and, a greater sense of independence to the Union Territories as legislative and executive powers were to a large extent to be exercised without Centre’s oversight. They were increasingly having the ‘trappings of statehood’.

Let us now turn to the Finance Commission. Born out of the Constitution and working as a fourth branch institution, it was endowed with independence from the Legislature and the Executive. The Council of Ministers acting through the President under Art. 280(3) cannot circumscribe the manner of its working but only has nominal, enabling powers to refer matters for the recommendations of the Commission. To execute its duties, the Finance Commission goes to different states and has elaborate consultations with the elected governments on their need and the manner in which the Finance Commission could aid them. Thus, all federal units have an equal voice in the process. This deliberative exercise leads to the devolution of funds. Not only its structural independence but also the adoption of such practices ensures that the States and the Centre believe the process of devolution to be fair. Both these factors, structural and functional independence allow for the Union and States to trust the Finance Commission and persuade the Centre to accept most of its recommendations.

After this understanding of Union Territories and the Commission, there are multiple factors which make for a convincing case for the Union Territories inclusion. At the outset, Union Territories have an independent and accountable government just like the states. Their limited powers do not take away from the fact they are independent in their functioning. This independence must enable them to stake a claim before the Finance Commission which recognizes their place as an integral part of the federal structure. This allows an independent body to hear their needs and make a fair assessment of how each Union Territory must be apportioned funds. The Centre must not replace the wisdom of the Finance Commission in understanding the inter-se distribution of resources within the Union Territories. Instead, the constitutional structure of allowing a dialogue between the federal units and the Finance Commission must lead to the devolution of funds where all federal units have an equal and fair opportunity. To read Union Territories within the scheme of Art. 280 would accord with such an understanding. As such, this interpretation is not repugnant to the context or subject of Art. 280 as required under the GCA.

The 11th Finance Commission considered this issue and on the legal opinion of the Ministry of Law, continued to exclude Union Territories. In support, they stated that there is a textual difference between “States” and “Union Territory” and therefore, the word “State” in Art. 280 should not include Union Territories. This argument completely ignores the specific amends made to the GCA and other contemporaneous legislative history highlighted above. It also failed to consider the separate and independent status of Union Territories with Legislature that provides a persuasive reason for their inclusion within the framework of the Finance Commission.


While States clamour for more finances in the wake of the pandemic, it is important to recollect that Union Territories are also similarly placed. Often, they get side-lined in the conversations around fiscal federalism. Much is spoken about co-operative federalism but, co-operation cannot be coerced. It should be earned and the first step is to stop treating Union Territories as second-class federal units not worthy of participation within our federal structure. Changes in their form and administration must come with the recognition that they are Union Territories and not Union’s Territories. Giving them an equal and fair say in the working of our fiscal system should be a good start towards the loftier goals of having a co-operative federal republic.

* The author is grateful to Amal Sethi for all the comments and suggestions on the earlier drafts.

Tejas is a 2020 graduate from NUJS Kolkata with a keen interest in constitutional law. He is going to join a litigation firm primarily practising at the Bombay High Court.

Picture Credits: The News Minute

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