Centre Likely to Cut States’ Tax Revenue Share, – What Could Be the Impact?
This proposal will be presented to the Finance Commission of India, according to a report by news agency Reuters, quoting sources familiar with the development.
The central government is considering a reduction in the tax revenues it shares with states, with a recommendation to cut the states’ share from the current 41% to at least 40%. This proposal will be presented to the Finance Commission of India, according to a report by news agency Reuters, quoting sources familiar with the development.
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Finance Commission to Review Recommendation
The Arvind Panagariya-led Finance Commission is set to review the proposal and submit its final recommendations by October 31. If approved, the changes could be implemented starting from the financial year 2026-27. The commission is responsible for making recommendations on the distribution of tax revenue and other aspects of centre-state fiscal relations.
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Cabinet Approval Expected by March
According to sources, the proposal is likely to be cleared by the Union Cabinet, chaired by Prime Minister Narendra Modi, by the end of March before being forwarded to the Finance Commission for further consideration.
Potential Financial Impact
A 1% reduction in the states’ tax share could result in an additional Rs 3,500 crore for the central government, based on projected tax collections for the ongoing financial year. One of the sources highlighted that the states’ share of central taxes has steadily increased from 20% in 1980 to 41% today, even as the central government’s spending obligations have risen due to economic challenges.
No Official Response Yet
The Ministry of Finance and the Finance Commission have yet to release any official statement regarding the proposal. The move is expected to spark discussions among states, many of which rely heavily on central tax allocations for their budgets.
