Over 22 Indian states demand 50% share in central tax revenue allocation

Business Standard

3 days ago

More than 22 of India's 28 states have asked the 16th Finance Commission to raise their share of the divisible tax pool from the current 41 per cent to 50 per cent, Commission chairman Arvind Panagariya said on Wednesday.
The Commission visited Lucknow as part of its ongoing consultations with state governments across the country. Addressing the media, Panagariya noted that states such as Uttar Pradesh have joined the majority in seeking a greater share of central tax revenues.
'At present, states receive 41 per cent of the total divisible tax revenue, while the Centre retains 59 per cent... UP, along with many others, has recommended increasing the state share to 50 per cent,' said Panagariya, according to a report by PTI.
Commission yet to confirm recommendation
Despite the widespread demand, Panagariya did not confirm whether the Commission would include this proposal in its final recommendations. He did, however, note that past Finance Commissions' recommendations have generally been accepted by the Centre without changes.
The 16th Finance Commission was constituted on 31 December 2023 under Article 280 of the Constitution. It has been tasked with recommending how tax revenues should be distributed between the Centre and the states for the five-year period beginning 1 April 2026. The Commission is expected to submit its report by 31 October 2025, covering fiscal years 2026–27 to 2030–31.
States carry heavier spending responsibilities
State governments account for over 60 per cent of total public expenditure in the country, with a significant focus on social infrastructure such as healthcare, education, and law and order. In contrast, the Union government primarily allocates spending to physical infrastructure.
Since the rollout of the Goods and Services Tax (GST) in July 2017, states have experienced a decline in their autonomy over revenue collection. Their capacity to raise funds independently has been curtailed, increasing their dependence on central transfers.
A related concern is the Union government's increased use of cesses and surcharges, which are not shared with the states. Since the onset of the Covid-19 pandemic, the share of these levies in the Centre's gross tax revenue has risen from 9–12 per cent to over 15 per cent. Last year, Tamil Nadu Chief Minister MK Stalin had called for an increase in the state's share of central taxes to 50 per cent, citing concerns over reduced devolution of funds and mounting financial burdens due to centrally-sponsored schemes. Speaking to Panagariya in Chennai, Stalin maintained the need for a revised fiscal framework that supports states like Tamil Nadu. He argued that allocating additional funds to high-performing states would enhance India's "overall development and economic strength".