States Demand Higher Share in Tax Revenue Explained
Focus keyphrase: States want tax revenue
In a recent development that could reshape India’s fiscal federalism, NITI Aayog Chairman Arvind Panagariya confirmed that a majority of Indian states want tax revenue share increased to 50% from the current 41%. This push comes ahead of the 16th Finance Commission’s deliberations, which will set the revenue distribution formula from FY 2026–27 onwards.
Let’s break down what this means for the economy, taxpayers, and intergovernmental finances.
Why Do States Want a Higher Tax Share?
- Current share: States get 41% of the Centre’s divisible tax pool (per 15th Finance Commission).
- States’ demand: Increase to 50% citing growing social sector burdens and infrastructure needs.
- Key concerns:
- Inflation-linked rise in welfare costs
- Higher devolution needed for development
- More spending autonomy
Legal Basis: How Is Tax Shared Between Centre and States?
| Basis | Details |
|---|---|
| Constitutional Provision | Article 280 mandates a Finance Commission every 5 years |
| Current Rule | 15th FC recommended 41% vertical devolution for 2021–26 |
| Upcoming Change | 16th FC (set up in 2024) to decide FY 2026–31 sharing formula |
| GST Compensation | Ended in 2022; States now push for higher revenue in tax devolution |
Which Taxes Are Included in Devolution?
- Included:
- Income tax
- Corporate tax
- Union excise (non-GST)
- Customs duty
- CGST (as per Article 270 post-GST amendment)
- Not Included:
- Cess and surcharges (retained 100% by Centre)
- Non-tax revenues
What Does This Mean for Taxpayers?
- No direct tax rate impact for individuals or businesses
- Indirect impact:
- May influence Budget 2026 allocations
- States may reduce dependence on local cesses
- Potential for improved infrastructure and welfare if States get more funds
Expert View: Why This Matters
“The 50% demand reflects India’s maturing federalism. States want more fiscal power, but with it must come accountability.”
— Senior economist, Delhi University
States argue that devolving more taxes will reduce their dependence on Central schemes and allow region-specific development.
CBDT + RBI Context
- CBDT 2024–25 report: ₹23.5 lakh crore gross tax revenue collected
- 41% share means: States received approx ₹9.6 lakh crore
- If raised to 50%: ₹11.75 lakh crore share (based on same collection)
This will widen the fiscal room for States by ₹2.15 lakh crore annually if approved.
What Happens Next?
- 16th Finance Commission recommendations due by October 2025
- Likely consultations with Finance Ministry, RBI, and state governments
Internal Challenges
- Centre reluctant to lose fiscal space amid rising defence and capital expenditure
- States like Tamil Nadu, Kerala back the 50% demand
- Northeastern and special category states want need-based allocation
FAQ
Q1. Will taxpayers pay more if tax share increases to 50%?
No. This affects only how existing taxes are divided between Centre and States.
Q2. What is the role of the Finance Commission?
It recommends how taxes collected by the Centre should be shared with States.
Q3. Will GST be affected?
No. GST is separately governed under Article 279A. But CGST forms part of divisible pool.
Summary
A majority of Indian states have urged the Centre to raise their tax revenue share from 41% to 50%. The 16th Finance Commission will decide this for FY 2026–31. If approved, states may receive over ₹2 lakh crore more annually, boosting regional development and fiscal autonomy.