States demand a bigger share of central taxes to boost local development. Here’s why it’s becoming a loud economic and political debate.
Rising Voices, Growing Needs
Imagine running a household where 59% of your salary is controlled by someone else. You ask for money, but they decide how much you get. That’s exactly how Indian states feel when it comes to tax revenue distribution.
Currently, the Indian government shares 41% of divisible tax revenue with states. But now, there’s growing demand—led by the BJP-ruled Uttar Pradesh and supported by several others—to increase it to 50%.
Why this sudden clamor? Let’s break it down.
The Economics Behind the Demand
Under India’s federal structure, the Centre collects most of the taxes—like income tax and GST—and then distributes a portion to the states. The idea is rooted in the principle of fiscal federalism, where resources are shared to meet the specific needs of regions.
However, states argue that their expenditure responsibilities—healthcare, education, infrastructure—have grown much faster than their revenue streams.
Here’s where the imbalance lies:
- Centre gets 59% of the tax pool
- States get 41%, but are responsible for delivering most public services
This mismatch often leads to delays in welfare schemes, patchy roads, underfunded schools, and even salary delays for local government employees.
More States, More Voices
Out of 28 Indian states, 21 have backed this push for a larger share. They’re not just asking for more money—they’re asking for more autonomy.
Some key demands include:
- Increasing states’ share from 41% to 50%
- Earmarking 10% of tax revenue for the 8 Northeastern states
- Compensation for forest cover conservation
- Special funds for states with difficult terrains or insurgency
Interestingly, these demands come from both BJP-ruled and Opposition-ruled states, showing that this issue transcends party lines.
The Hidden Tax: Surcharges and Cesses
Another major grievance is the growing use of surcharges and cesses by the Centre. These are taxes collected outside the divisible pool—meaning states don’t get a share.
For instance:
- Health cess
- Infrastructure cess
- Education cess
These now make up over 18% of the Centre’s gross tax revenue. That’s like collecting rent from tenants but not sharing it with your business partner who owns 40% of the building.
What This Means for You
If you’re a young professional or a business owner, you might wonder: how does this affect me?
Let’s say you’re an entrepreneur in Assam. If your state had a higher share of tax revenue:
- Better roads could cut your logistics costs
- Local grants could fund your start-up
- Skilled labor programs could improve workforce quality
Or imagine you’re a software engineer from Mizoram. With more funds, your state might invest in broadband infrastructure, helping your hometown join the digital economy.
In economic terms, this is about resource allocation efficiency. When local governments—who understand local needs better—get more money, they can invest it more productively. That leads to higher marginal returns on every rupee spent.
The Centre’s View: A Balancing Act
Of course, the Centre has its own responsibilities—defense, national highways, international diplomacy. It also needs to redistribute resources to poorer states through central schemes.
Too large a share for states may weaken the Centre’s ability to function effectively, especially in times of crisis like a pandemic or war.
So the real debate is not just about percentages. It’s about finding the right balance between central coordination and state-level flexibility.
Looking Ahead
The 16th Finance Commission, led by Arvind Panagariya, is reviewing these demands and will submit its recommendations by October 31. Whether or not the 50% mark is granted, one thing is clear—the call for fiscal decentralization is growing louder.
In the long run, empowering states fiscally may lead to a more responsive, competitive, and inclusive economy.
And that’s something worth taxing our minds over.
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