Context:
The Union Government plans to reduce the share of tax revenue allocated to States from 41% to 40%.
The proposal will be sent to the Finance Commission (headed by Arvind Panagariya) for the recommendations.
If approved, the change will be applicable from FY 2026-27.
Expected Revenue Impact
- A 1% reduction in States’ share could give the Centre approximately ₹350 billion.
- Actual impact depends on the level of annual tax collections.
Cabinet Approval and Timeline of the Process
- It is expected that the Union Cabinet shall clear the proposal by March end.
- It is to be submitted to the Finance Commission for the final recommendations.
- The Commission’s report will be binding and shall be submitted by October 31, 2025.
Possible Tensions Between Centre & States
- Anticipating opposition from States, as it reduces their fiscal resources.
- It may trigger further financial disputes between the Centre and States, especially if they are led by the opposition.
- So far, no official comment has come from the Finance Ministry or the Finance Commission.
Proposal to reduce the States’ share from 41% to 40%. Central government stands to gain from ₹350 billion from this change. There could be political tussles over sharing of revenue.
Source: The Hindu
