CENTRE PROPOSES REDUCTION IN STATES’ TAX SHARE

GS3 ECONOMICS:

Key Proposal

• The central government plans to lower states’ share of federal tax revenue from 41% to 40%, potentially increasing central funds by ₹35,000 crore ($4.03 billion).
• The Finance Commission will review the proposal, with binding recommendations expected by October 31, 2025.

Fiscal Impact & Revenue Constraints

• India’s fiscal deficit for 2024-25 is projected at 4.8% of GDP, while states face a 3.2% deficit.
• States account for over 60% of public spending, primarily on social infrastructure, whereas the Centre focuses on physical infrastructure.
• The introduction of GST (2017) has limited states’ independent revenue generation, increasing reliance on central allocations.

Conditional Grants & Policy Shift

• The Centre may impose conditions on grants, discouraging politically driven expenditures like cash handouts and debt waivers.
• Revenue-deficit grants have already declined from ₹1.18 trillion (2021-22) to ₹13,700 crore (2025-26).

Potential Consequences

• States may need to adjust their budgets to compensate for reduced central funding.
• The evolving fiscal structure could impact governance, public welfare programs, and federal-state financial relations.