Cut in states’ tax share a retrograde move

Reports that the Central government would recommend to the Finance Commission a reduction in the states’ share of federal tax revenues have caused apprehensions among the states. According to reports, the Central government will recommend the share of taxes going to states to be reduced to at least 40 per cent from the current 41 per cent.

The Finance Commission, a constitutionally appointed body, makes recommendations on tax sharing between the Centre and the states. The 16th Finance Commission under Arvind Panagariya is now holding discussions on the matter and will submit its recommendations by October 31, to be implemented from fiscal year 2026-27. The share of taxes going to the state governments has progressively increased from 20 per cent in 1980 to 41per cent now. The 15th Commission had raised it from 40 per cent to 41per cent.

The purported reason for the demand for reduction in the states’ share is the increase in spending requirements of the central government, especially when the economy has slowed down. The Centre’s fiscal deficit is estimated at 4.8 per cent of the GDP for 2024-25, while the states have a fiscal deficit of 3.2 per cent of the national GDP. But that would not be a good enough reason to cut the share of states when they are facing serious financial problems. The states have limited scope and power to raise revenues since the implementation of the GST in 2017. If their share in taxes is reduced from 41per cent to 40 per cent, the Centre will gain an additional Rs 35,000 crore. This will be at the expense of the states. The Centre does not share with the states the income it earns through cesses and surcharges. This accounts for about 15per cent of the Centre’s revenues. It is estimated that if this is taken into consideration, the states’ share would be much less than the present 41per cent.

Many states have actually sought an increase in tax share from 41per cent to 50 per cent. They have based their demand on their inability to raise resources when expenditure is increasing. States have a share of over 60 per cent in the total government spending in the economy. States in the South also have the grouse that they get much less than what they contribute to the national kitty. They will not accept any cut in their share in tax revenues. Karnataka Chief Minister Siddaramaiah has criticised the Centre over the proposal and accused it of trying to make the Finance Commission a tool to suppress the states’ rights. The proposal is a retrograde idea which would further weaken and strain the federal spirit and relations.