FM says Centre has fully honoured 41% tax devolution to states, cites Finance Commission report

Finance Minister Nirmala Sitharaman on Wednesday rejected allegations that the Centre had short-changed states in tax transfers, telling the Lok Sabha that the government had fully complied with the Finance Commission’s recommendations.

Responding to criticism over resource transfers, Sitharaman said the 16th Finance Commission had examined devolution from 2018–19 to 2022–23 and concluded that the Centre’s transfers to states “exactly match” the Commission’s recommendations for each of those years.

“We are not the only ones claiming this,” she said. “The Finance Commission itself, after studying this in detail, has clearly stated that whatever amount has to go from the Central Government to the State Governments has been given. There is no scope for any doubt.”

The Finance Minister also addressed repeated allegations that the Centre had not transferred the mandated 41% share of divisible taxes to states.

“I will assure this House… 41% it is that we have transferred to the states. We have not reduced any state’s transfer of devolvable tax,” she said.

Sitharaman said total resources to be transferred to states in 2026–27 — including tax devolution and releases under centrally sponsored schemes — are estimated at ₹25.44 lakh crore, marking an increase of ₹2.70 lakh crore over the previous year.

Clarifying the calculation of states’ share, the minister said the Constitution provides that 41% is to be computed on “net proceeds” of taxes, not gross tax revenue. Net proceeds, she explained, are determined after the Comptroller and Auditor General (CAG) audits the accounts and exclude cess and surcharge from the gross tax revenue to arrive at the divisible pool.

“From the gross tax revenue, you remove the cess and the surcharge; whatever remains after that is called the divisible pool. From that, the 41% to the states is decided,” she said, adding that the Constitution permits the Centre to levy cess and surcharge.

Her remarks come amid ongoing political debate over fiscal federalism and the Centre’s use of cesses and surcharges, which are not part of the divisible pool shared with states.