The team led by economist Arvind Panagariya will submit its recommendations by October 31, which will be implemented in the 2026-27 fiscal year. Recommended to be binding.
One of the sources said the central government will recommend reducing the share of tax revenue to states to at least 40% of the current 41%.
The second time sources said the proposal could be cleared by the Modi-led minister’s cabinet before the end of March and then sent to the Finance Committee.
Based on the expected tax collection for the year, a 1% tax share in states could provide the federal government with about Rs 350,000 crore. The final figure will vary based on the individual’s tax collection for one year. The emails sent to the Ministry of Finance and the Finance Committee received no response. The share of taxes entering the state government has jumped from 20% in 1980 to 41% now. But spending requirements for the federal government, especially over the years of the slowdown, have increased, the first source said.
Sources said this led to calls for a lower share of tax revenue.
The center’s fiscal deficit is estimated at 4.8% of GDP in 2024-25, while the states’ fiscal deficits account for 3.2% of national GDP.
States have more than 60% of the total government spending in the economy and generally spend more on social infrastructure such as health and education, while federal spending is more concentrated on physical infrastructure.
However, since the implementation of the national GST in July 2017, states have limited revenue growth.
Since the 199 pandemic, the central government has also increased the share of taxes and surcharges that have not been shared with states, reaching more than 15% of total tax revenue, from 9% to 12% ahead of schedule.
The transfer of resources available to states may lead to changes in expenditure priorities.
One of the sources said the federal government could also propose ways to prevent states from giving cash checks, debt relief and other so-called freebies to earn political gains.
One approach is to link the states’ shortage of taxes to the states with certain conditions, the sources said, adding that states are eligible for such grants only after these conditions are met.
It is unclear whether the federal government will deny grants to states deemed to offer free gifts.
Over the past five years, grants for these defects have dropped from Rs 1.18 crore (US$13.61 billion) in 2021/22 to an estimated Rs 13.7 billion (US$1.58 billion) in the 2025/26 budget.
