A Fair Share: States vs Centre in Tax Sharing : THE HINDU EDITORIAL SIMPLIFIED

 A Fair Share: States vs Centre in Tax Sharing

---

Relevance:

• Class 10 (Economics/Civics): Role of taxes, Centre-State cooperation, revenue sharing.

• Class 11 (Political Science): Federalism, Finance Commission, distribution of powers.

• Class 12 (Indian Politics): Fiscal federalism, tax policy, Centre-State financial relations.

1. What is Happening?

• The Sixteenth Finance Commission (SFC) will decide how money is shared between the Centre and States starting April 1, 2026.

• Its Chairman, Arvind Panagariya, said 22 out of 28 States (including BJP-ruled ones) want their share in the divisible tax pool to go up from 41% to 50%.

---

2. Why Do States Want More?

• This demand is legitimate because the Centre is collecting more tax through cesses and surcharges, which are not shared with States.

• These non-shareable collections rose from:

  • 12.8% (2015–2020) to

  • 18.5% (2020–2024)

• This reduced the real share of States in total tax revenue to about 31%, down from 35% earlier.

---

3. GST’s Impact on States

• After GST, States lost many ways to earn their own money.

• Even though GST collections are good now, States still depend heavily on the Centre’s financial transfers.

---

4. Current Sharing Formula Has Problems

• The formula to share funds between States is called horizontal devolution.

• It gives more weight to population and income difference, which punishes well-performing States like those in the South.

• These States feel they are being penalised for being efficient and responsible.

---

5. Why the Centre May Say No

• Mr. Panagariya said raising the share to 50% would “upset too many carts”.

• The Centre needs money for defence and big projects, so it may not want to reduce its own share.

• So, the Commission may keep the 41% share unchanged.

---

6. What Can Be Done?

• Keeping things the same would go against cooperative federalism, which the BJP-led Centre supports.

• A small increase in the States’ share could be a good middle ground.

• The Finance Commission should also:

  • Control the use of cesses/surcharges

  • Maybe fix a limit on them

  • Include extra collections in the divisible pool

  • Change the horizontal formula to balance:

    • State’s needs

    • Area

    • Performance

---

7. Conclusion

• A fair sharing formula is needed.

• It must be fiscally sensible and support India’s federal system, where States are the roots.

---

By: Shivam Saxena