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Despite Finance Commission Advisory, Modi Government Allocates Lower Share of Taxes to States

EconomyDespite Finance Commission Advisory, Modi Government Allocates Lower Share of Taxes to States

Amidst growing dissatisfaction among states regarding lower fund allocation, economists revealed on Tuesday that for the fiscal year 2025, the Union government has budgeted to allot 35.5 percent of the divisible tax pool to states, a figure lower than the 41 percent recommended by the 15th Finance Commission.

A detailed analysis of Union budget documents from previous years highlights a consistent trend of tax devolution to states falling significantly below the levels recommended by the Finance Commission.

Sunil Kumar Sinha, Principal Economist at India Ratings and Research (Ind-Ra), remarked, “We believe that this, along with some focus on the marginalized section, has been the key takeaways from the budget. However, the lower transfers to states remain a matter of concern.”

The share of states in central taxes has been on a downward trajectory, averaging 35.4 percent of the divisible pool during the period from FY21 to FY25 (Budget Estimates), a decline from 39.8 percent recorded during FY16 to FY20, as reported by the rating agency.

Finance Secretary T.V. Somanathan addressed concerns in an interview with a news channel, stating, “In the operation of the finance ministry regarding funding to states, we adhere to a formula laid down by the Finance Commission… we have not discriminated, for or against, any state government.”

Somanathan clarified that the distribution of tax revenue, including the allocation of GST, has been a contentious issue for years, with states like Bengal and Punjab frequently asserting that their dues have been withheld. He emphasized that the sharing of tax revenue is based on percentages established by the Finance Commission and audited by the Comptroller and Auditor General.

“We release funds according to percentages… so as long as the previous installment was spent, the money will be released,” Somanathan assured.

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