Intro Paragraph:
States demand higher tax share from the Centre, arguing that their contribution to GDP and population size must weigh more in the Finance Commission’s formula.
Why Are States Asking for a Bigger Tax Share?
India follows a tax devolution model where a part of the Union’s gross tax revenue is shared with States based on recommendations of the Finance Commission. But several States now claim the current formula ignores key realities.
Key concerns raised:
- Southern and industrial states contribute more to GDP and tax collections.
- Welfare burden is rising due to internal migration.
- Central schemes often require matching State funds.
What Is the Current Tax Sharing Formula?
The 15th Finance Commission (2021–26) adopted the following formula to divide 41% of divisible tax pool among States:
| Factor | Weightage |
|---|---|
| 2011 Population | 15% |
| Area | 15% |
| Forest and Ecology | 10% |
| Income Distance | 45% |
| Tax Effort | 2.5% |
| Demographic Performance | 12.5% |
🔍 Income distance rewards poorer States by giving them a larger share. But better-off States argue this disincentivises growth and tax compliance.
States’ Key Demands
- Use 2021 Population estimates instead of 1971/2011 for fairness.
- Reward economic performance and GST efficiency.
- Link devolution to contribution in direct/indirect taxes.
- Reduce conditional grants, allow more untied funds.
Southern states like Tamil Nadu, Karnataka, and Kerala have led these calls, citing their advanced demographic transition and better governance records.
Legal & Policy Basis
- Article 280 of the Constitution mandates a Finance Commission every 5 years.
- 14th FC increased devolution to 42%; 15th FC fixed it at 41%.
- States cannot directly negotiate their share – they rely on FC recommendations.
The upcoming 16th Finance Commission (due 2025) will revisit the formula, possibly factoring in the political and fiscal tension brewing now.
Expert Insight
“Using outdated census data penalises States that have succeeded in controlling population growth. It also misaligns incentives for fiscal responsibility,” says Prof. Rathin Roy, former FC member.
He recommends that a hybrid model that weighs both equity and contribution could be a better path forward.
Implications for Taxpayers and Businesses
- Businesses operating in high-GDP states may see better infrastructure and digital services if States receive more funds.
- State-level incentives and tax breaks could shift based on fiscal space.
- Fiscal competition among States could intensify.
FAQ
Q1: Who decides how tax revenue is split between Centre and States?
A: The Finance Commission, a constitutional body under Article 280.
Q2: Why is 1971 Census still used in tax devolution?
A: It was frozen for political reasons to avoid penalising States that implemented family planning.
Q3: Can States refuse Central funding schemes?
A: They can opt out, but most participate to avoid losing resources.
Final Takeaway
As States demand higher tax share citing population and GDP metrics, India stands at a fiscal crossroads. The next Finance Commission will play a key role in redefining how cooperative federalism translates into actual resource flow.
Summary
Several Indian States demand higher tax share from Centre, citing GDP contribution and outdated population data. Finance Commission’s formula may see big changes in 2025.