States’ cries for a fairer fiscal bargain cannot be brushed aside. The Sixteenth Finance Commission, chaired by Arvind Panagariya, must decide how much of the Centre’s tax revenue should flow to them from April 2026. Twenty-two of 28 States, many ruled by the BJP, want the vertical share lifted from 41 per cent to 50 per cent. Their case is strong.
New Delhi has steadily swollen its take by piling cesses and surcharges that are exempt from sharing. Such levies formed 12.8 per cent of gross taxes before the pandemic; they now top 18 per cent. The States’ effective slice has slipped from 35 per cent to barely 31 per cent. The Goods and Services Tax has tightened the screw. After surrendering myriad local taxes, States depend on transfers yet bear mounting spending responsibilities. Worse, the horizontal formula, which weights population and income distance heavily, punishes the South for prosperity and prudent management.
Panagariya warns that a nine-point leap would “upset too many carts”; the Centre cites defence and capital needs. Holding the line at 41 per cent, however, would mock the rhetoric of co-operative federalism and miss a chance to reset relations. A middle course is feasible. Raising the share to, say, 45 per cent would cost the Centre scarcely 0.5 per cent of GDP yet signal good faith.
The Commission should go further. Cap cesses and surcharges at a fixed share of gross taxes, and sweep any excess into the divisible pool. Adjust the horizontal formula to reward revenue effort, demographic stabilisation and basic services alongside need. A federal union is only as strong as its constituent parts. Giving States predictable resources and fair incentives is not generosity; it is self-interest. India’s growth, social cohesion and democratic vibrancy depend on a fiscal compact that treats every tier with respect.
