States put up united front in fight for a higher share in divisible pie

Most governments, including those run by BJP, want the 16th Finance Commission to increase their share to 45-50 per cent from 41 per cent

With time till October 31 to submit its report, and with its recommendations set to cover the five-year period starting on April 1, 2026, the 16th Finance Commission has visited almost all the states since its first in June last year — to seek their views on revenue sharing between the Centre and states.

 

Most state governments, including those run by the Bharatiya Janata Party (BJP), want the states’ share in the central divisible pool to be increased from 41 per cent now to 45-50 per cent.

 

Some states, especially those ruled by the Congress and its allies in the INDIA bloc, have flagged the increase in varieties of cess and surcharges over the past decades by the Centre and how, since these imposts are not part of the divisible pool, have led to the shrinking of the funds to be divided, causing the states a loss in their share of revenue.

 

The commission held its first meeting, under the chairmanship of Arvind Panagariya, on February 14, 2024, in New Delhi. Its first visit was to Himachal Pradesh on June 24-25, 2024. Since then, it has gone to all states barring Haryana, Jharkhand, Uttarakhand, and Uttar Pradesh. It is scheduled to visit Maharashtra on May 8-9.

 

States ruled by the Congress and other regional parties that are not constituents of the National Democratic Alliance (NDA) have demanded the states’ share in tax devolution be increased to 50 per cent from the 41 per cent set by the 15th Finance Commission.

 

Southern states, such as Kerala, have held conclaves of Opposition-ruled states. The conclaves have reflected a growing trust deficit between the Centre and the states. The states are demanding a 50 per cent share. In September, Kerala Chief Minister Pinarayi Vijayan hosted a conclave of the finance ministers of Karnataka, Tamil Nadu, Punjab, and Telangana. They highlighted the increasing trend of surcharges and cess levied by the Centre and hence the shrinkage of the divisible pool of taxes.

 

Some BJP-ruled states too have sought an increase in the states’ share. Madhya Pradesh Chief Minister Mohan Yadav asked the panel to increase the share of the states to 48 per cent.

 

“The strength of the nation lies in the strength of the states. Therefore, the share of the states in central taxes and revenue receipts, that is grants, must be increased,” Yadav said at the meeting with the panel last month.

 

In Odisha, which the commission visited on February 4-6, Chief Minister Mohan Charan Majhi wanted the states’ share to be 50 per cent. At a press conference in Bhubaneswar, Panagariya said most states, including Odisha, had asked for 50 per cent while a few settled for 45 per cent. He said some had also asked for a portion of the cess and surcharges.

 

In Gujarat, ruled by the BJP, which the commission visited on October 21-22, Chief Minister Bhupendra Patel suggested the panel reward states such as Gujarat that maintained fiscal prudence. He said it should focus on performance indicators that reflected state efficiency and outcomes.

 

Gujarat Finance Minister Kanubhai Desai stressed the need for the commission to assess states based on performance in key areas such as renewable energy, climate change, and sustainability.

 

Several other states, including Punjab, Tamil Nadu, and West Bengal have demanded an equal share of devolution between the Centre and the states. At the commission’s meeting with the Tamil Nadu government on November 18-19, it asked for a new criterion — a state’s contribution to the country’s gross domestic product (GDP) — to calculate the distribution of taxes collected.

 

In Karnataka, which the commission visited on August 29-30 last year, Chief Minister Siddaramaiah asked it to address the vertical and horizontal imbalances, keeping principles of both equity and efficiency in mind. He flagged the concern of some of the southern states, and asked the commission to “carefully examine the impact of extremely high emphasis given to equity on the incentives of well performing states”.

 

Siddaramaiah said the “taxpayers of such states expect their taxes to work for them”.

 

“Economically advanced states are committed to supporting poorer states, but this should not come at the expense of their own residents or economic efficiency,” he said. Vertical devolution should be at least 50 per cent of the divisible pool, and the cesses and surcharges should be capped at 5 per cent of gross tax revenue. Anything exceeding that should be part of the divisible pool, he said.

 

The Karnataka chief minister said despite his state’s substantial contribution of about ₹4 trillion to the gross tax revenue of the Union every year, the state got about ₹45,000 crore in the form of devolution and about ₹15,000 crore grants-in-aid.

 

“This means that for every rupee Karnataka contributes, only 15 paise is returned to the state,” he said.

 

As several chief ministers in their interactions with it have suggested to the commission, it has to perform a tightrope walk to balance equity with efficiency and performance, and also try to reduce the growing trust deficit between the Centre and some of the states.