Centre Defends 41% State Tax Share

Centre Defends States’ Tax Devolution Share

Why in the News ?

The Union Finance Minister clarified in the Lok Sabha that the Centre has fully transferred 41% of the divisible pool of taxes to States as recommended by the 15th Finance Commission, countering Opposition allegations regarding reduced fiscal devolution.

Government’s Clarification on Tax Devolution:

  • The Union Finance Minister asserted that the Centre has consistently transferred 41% of the divisible pool to States, as mandated by the 15th Finance Commission (2020–26).
  • Allegations that the Centre reduced States’ share were rejected, with assurance that no State’s devolvable tax share was curtailed.
  • The 16th Finance Commission reviewed transfers from 2018–19 to 2022–23 and confirmed that devolution matched the Commission’s recommendations annually.
  • Total estimated transfers to States for 2026–27 stand at ₹25.44 lakh crore, including tax devolution and allocations under Centrally Sponsored Schemes (CSS).
  • This marks an increase of ₹2.7 lakh crore over 2025–26 and ₹3.78 lakh crore higher than 2024–25 actuals, reflecting enhanced fiscal support.

Medium-Term Fiscal Vision and Infrastructure Push

  • The Budget is positioned as the first in the second quarter of the 21st century, outlining fiscal priorities from 2026 to 2050.
  • It coincides with the beginning of a new cycle under the 16th Finance Commission, shaping medium-term fiscal projections.
  • The government emphasises sustained investment in infrastructure development to drive growth.
  • Focus areas include roads, National Highways, and inland waterways to reduce logistics costs.
  • Special attention is being given to hinterland States, aiming to enhance connectivity, competitiveness, and regional balance.

Understanding Divisible Pool, Cesses and Constitutional Provisions :

●      The Divisible Pool refers to the portion of net tax proceeds shared between Centre and States under Article 270 of the Constitution.

●      The Comptroller and Auditor-General (CAG) determines the net proceeds after deducting cesses and surcharges from gross tax revenue.

●      Cesses and surcharges, authorised under Article 271, are not shareable with States and are levied for specific purposes like health, education, and infrastructure.

●      Opposition criticism centres on the argument that higher reliance on cesses shrinks the divisible pool, reducing States’ effective share.

●      The Centre maintains that these levies ultimately benefit States through targeted expenditure such as schools, hospitals, and roads.