At the heart of the debate is vertical devolution — the share of central taxes that flows to states. Currently, 28 states together receive 41% of the Centre’s divisible tax pool. However, a significant majority of states are now pushing for a much higher share, arguing that their fiscal space is steadily shrinking even as expenditure responsibilities rise.
States seek bigger slice of tax kitty
As many as 18 out of 28 states — nearly two-thirds — have demanded that their share in central taxes be raised to 50%. Other states have pitched for a range between 41% and 48%. Two states have gone a step further, seeking a 48–50% devolution that would also factor in the Centre’s cess and surcharge collections.
The demand stems from a long-standing grievance: while the Centre’s reliance on cess and surcharges has increased over the years, these levies are excluded from the divisible pool and therefore not shared with states. State governments argue that this has effectively narrowed the pool of resources available for devolution, even as headline tax collections have risen.
Push to include cess, surcharge — or compensate states
To address this, states have urged the Finance Commission to either include cess and surcharge collections in the divisible pool or compensate them through a higher share of overall tax devolution. Some proposals have been more structural in nature. Madhya Pradesh, for instance, suggested that the Centre should be required to seek ratification from at least 50% of states before introducing any new cess or continuing existing ones.
Beyond taxes, states have also sought a share in the Centre’s non-tax revenues. These include proceeds from spectrum auctions, offshore oil exploration, dividends from central public sector enterprises (CPSEs), and receipts from asset monetisation programmes.
Greater flexibility under centrally sponsored schemes
Another key demand relates to centrally sponsored schemes (CSS). States have asked for greater fiscal flexibility in the design and implementation of these schemes, along with a higher funding contribution from the Centre. They have also pushed for rationalisation and consolidation of CSS, arguing that overlapping schemes constrain their ability to tailor spending to local priorities.
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Centre flags fiscal constraints, constitutional limits
The Centre, however, has pushed back firmly. In its submissions, it has argued that even the current level of tax devolution is fiscally unsustainable. According to the Centre, when all transfers are accounted for, the effective sharing of resources with states already works out to nearly 49% of its gross revenue.
The Union government has also pointed out that its own non-debt resources have been declining over time, limiting its fiscal headroom. On the core issue of cess and surcharges, the Centre has maintained that including them in the divisible pool would be contrary to the Constitution. It has described the matter as a settled one and indicated that the debate should be considered closed.
