The Indian government is considering reducing the share of federal tax revenue given to states from 41% to 40% starting in 2026. This proposal is expected to be reviewed by the Finance Commission and the cabinet by March 2025.
Why is the Government Doing This?
The central government needs more funds to cover its spending, especially during economic slowdowns. A 1% reduction in states’ tax share could give the government an extra ₹35,000 crore ($4.03 billion) annually.
How Will This Affect States?
States currently handle over 60% of total government spending, mainly on health and education. Since the introduction of GST in 2017, their ability to raise funds independently has reduced. The central government has also increased taxes in the form of cesses and surcharges, which are not shared with states.
Other Proposed Changes
The government is also planning to discourage states from offering excessive financial incentives, such as cash handouts and loan waivers. Future federal grants may be linked to conditions that states must meet to receive them.
What’s Next?
If approved, this policy could reshape how funds are distributed in India. It may lead to debates on fiscal federalism and impact how states manage their budgets.
