India's federal government has announced its decision to maintain the states' share in the common pool of federal taxes at 41% for the upcoming five-year period, from 2026 to 2031. The revelation, made by the Finance Minister on Sunday, immediately drew sharp criticism from several opposition leaders, setting the stage for renewed debate on fiscal federalism in the South Asian giant. This 41% allocation represents the vertical devolution — the portion of taxes collected by the central government that is shared with the states. This figure was originally recommended by the 15th Finance Commission for the 2021-26 period. The government's move to "retain" this percentage effectively pre-empts the recommendations of the newly constituted 16th Finance Commission, which is specifically tasked with devising the revenue-sharing formula for 2026-31 and beyond. Typically, the Finance Commission, a constitutional body established under Article 280 of the Indian Constitution, is instrumental in outlining the principles and formula for the distribution of net tax proceeds between the Union and the states, as well as among the states themselves. For India's 28 states and 8 union territories, this share of federal taxes forms a critical lifeline, bolstering their fiscal capabilities to fund essential public services such as healthcare, education, infrastructure development, and various social welfare schemes. A higher or lower share directly impacts their financial autonomy and ability to address specific regional needs and development priorities. The divisible pool includes major federal taxes like income tax, corporate tax, and the central components of the Goods and Services Tax (GST). Opposition leaders have voiced concerns, arguing that the retention of the 41% share, without an upward revision, may not adequately address the growing responsibilities and expenditure burdens increasingly borne by the states. Critics suggest that states are often at the forefront of implementing development projects and welfare programmes, yet their revenue-generating capacity remains constrained compared to the federal government. Some argue that this decision could further exacerbate fiscal centralisation, limiting states' flexibility and potentially leading to a greater reliance on central grants, which often come with specific conditionalities. The expectation from many states, particularly those with rapidly expanding populations and developmental ambitions, was for an increase in their share, citing rising costs and increased devolution of functions without a corresponding increase in funds. While the Finance Minister's brief statement did not detail the rationale, the government's decision to maintain the status quo could be aimed at ensuring fiscal stability and predictability for both the Centre and the states, especially as the nation navigates post-pandemic economic recovery and ambitious growth targets. It might also reflect a balancing act between the Centre's own financial needs for national defence, major infrastructure, and central schemes, and the demands of cooperative federalism. This decision underscores the ongoing dynamic tension in India's federal fiscal architecture. While the principle of tax devolution aims to strengthen states' autonomy, the actual percentage and its perceived adequacy remain a perennial point of contention. The 16th Finance Commission now faces the task of working within this announced framework for the vertical devolution, while still making crucial recommendations for horizontal devolution (distribution among states based on various criteria like population, area, and fiscal capacity) and other specific grants. As India gears up for the next fiscal cycle, the federal government's decision on tax devolution will undoubtedly influence state budgets, development strategies, and the broader trajectory of economic federalism. The debate sparked by this announcement highlights the intricate balance required to foster both national unity and regional development through equitable resource distribution.
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