Thu Feb 05 06:36:50 UTC 2026: ### Centre Prioritizes Itself Over States in Tax Revenue Sharing, Raising Concerns

The Story:
A new report analyzing the 16th Finance Commission (FC)‘s recommendations reveals a growing tension between the central government and the states regarding the distribution of tax revenue. The FC has maintained the vertical devolution rate at 41%, the share of the divisible pool allocated to states. However, the report highlights that the Centre’s increasing reliance on cesses and surcharges, which are excluded from the divisible pool, effectively shrinks the revenue available to the states. This trend has sparked criticism, with numerous states demanding a larger share of the revenue to meet their constitutional responsibilities.

The report argues that the FC’s stance favors the Centre’s financial needs, citing justifications such as increased defense spending and infrastructure development. While acknowledging the undesirability of long-term reliance on cesses and surcharges, the FC refrained from imposing a cap, leaving the responsibility for change with the Centre, and prompting accusations of failing to mediate fairly between the Centre and the states.

Key Points:

  • The 16th FC maintained the vertical devolution rate at 41%.
  • The Centre is increasingly favoring cesses and surcharges over traditional taxes, reducing the divisible pool.
  • Between 2013 and 2019, cesses and surcharges comprised ₹5-7 per ₹100 collected. By 2021-22, this increased to ₹13.5. It is expected to be around ₹11 for 2025-26.
  • Cesses collected by the Centre, excluding GST compensation cess, increased from ₹44,688 crore in FY15 to ₹3,52,650 crore in FY22, and is expected to be ₹2,51,206 crore in FY26.
  • Surcharges collected have risen from ₹15,702 crore in FY15 to ₹40,758 crore in FY22, and is expected to be around ₹1,72,500 crore in FY26.
  • 18 States, including Odisha, Haryana, Gujarat, Kerala, and Tamil Nadu, have demanded an increase in vertical devolution from 41% to 50%.

Critical Analysis:

The historical context provides some insight into the state’s perspectives. The mention of Kerala Finance Minister K.N. Balagopal expressing concerns about the Indo-U.S. trade deal signaling danger for India suggests a broader anxiety among some states about the Centre’s economic policies and their potential impact on state finances. This lends further credence to the argument in the primary article that the states may indeed need a larger share of revenue, as claimed.

Key Takeaways:

  • The Centre’s fiscal strategy of increasing cesses and surcharges is creating friction with the states.
  • The 16th FC‘s recommendations appear to prioritize the Centre’s financial interests.
  • There is a growing sentiment among states that they are not receiving a fair share of tax revenue.
  • The situation necessitates a collaborative dialogue and potential restructuring of tax revenue sharing between the Centre and the states.
  • The constitutionality of the disproportionate rise in cesses and surcharges is being questioned.

Impact Analysis:

The continued imbalance in revenue sharing could strain Centre-State relations, potentially impacting policy implementation and economic development across the country. If the Centre continues to rely heavily on cesses and surcharges, it risks alienating the states and undermining the principles of fiscal federalism. This situation may lead to increased calls for greater state autonomy and a re-evaluation of the financial powers granted to the Centre under the Constitution. Long-term, this could reshape the financial architecture of India, impacting everything from infrastructure development to social welfare programs. The future fiscal stability and cooperative federalism of India depends on a resolution to this growing divide.

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