As the Centre moves to reduce States’ share of tax revenue, financial power is becoming increasingly concentrated. With States responsible for over 60% of total government spending, this shift threatens their ability to fund essential services and make independent decisions. It is a sign of increasing corporate dominance over the decision-making process regarding the allocation of public financial resources.
The central government’s increasing control over tax revenues and its sustained push for fiscal consolidation over the years have progressively undermined the financial autonomy of states, narrowing their decision-making powers. One stark example is the recent suggestion to cut the share of states in tax revenue by the Centre from FY27, further concentrating power in the hands of the Central Government and the ruling party.
In early 2025, the Centre set up a panel to reassess the allocation of tax revenues between the Centre and the States. This panel, comprising senior economists and policymakers, was tasked with evaluating the existing fiscal framework and suggesting adjustments to align with the Centre’s economic priorities. After detailed deliberations, the panel submitted its report, recommending a reduction in the States’ share of tax revenue from the current 41% to at least 40%. At current tax rates, this proposal is expected to put 35,000 crore more in the hands of the central government. This proposal is expected to be reviewed by the Prime Minister’s cabinet by the end of March 2025. If approved, it will be forwarded to the Finance Commission, which has the authority to make binding recommendations on tax distribution and Centre-State financial relations for the next five years.
This development has raised concerns among State governments and financial analysts, as it signals a further concentration of financial power, likely to negatively impact the funds allocated for essential public services. Given that States account for over 60% of total government spending—with an even higher share of public spending on health, education, drinking water suppy, irrigation and rural development—any reduction in their share of tax revenue could severely impact their ability to meet these needs of their people.
This proposal, combined with other long-standing policies, signals a continued trend of diminishing states’ fiscal space. Historically, the Centre has used the Goods and Services Tax (GST) to limit states’ control over indirect taxation. While states retain authority to decide the rates of taxes on liquor and petroleum, the power to set the rates of indirect taxes on the sale of goods and services has become highly concentrated in the hands of the Centre.
Over time, tax-sharing arrangements have been tilted in favour of the Centre, as exemplified by the growing share of GST collected by the federal government. In the 2025-26 budget, the Centre’s tax receipts are estimated at Rs. 42.7 lakh crore, with a large portion coming from indirect taxes such as GST, custom duties, and excise. Simultaneously, the Centre has increased its reliance on cesses and surcharges, which are not shared with the States, which have risen from 9-12% of gross tax revenue before the COVID-19 pandemic to over 15% now. In addition to the above mentioned measures, the Centre is also considering the imposition of conditions on grants to State governments, so as to discourage them from offering welfare measures such as cash transfers and debt waivers, branding them as ‘freebies.’ This move would erode the States’ policy independence, leaving them with even less control over their own budgets and governance priorities.
The imposition of fiscal responsibility frameworks, which prioritize debt servicing over social expenditure, reflects a broader economic agenda that aligns with the interests of large money lending institutions. As states become more financially reliant on the Centre, their ability to make decisions that benefit their populations is stifled. The vast majority of the people are now more susceptible to the political whims of a central government that operates in favour of the largest monopoly houses, rather than the needs of ordinary citizens.
In this context, the people’s role in decision-making, which is already meagre, continues to shrink. Ultimately, this trend could culminate in a situation where decision-making is completely concentrated at the Centre, with no possibility for the working people and even regional propertied interests to influence decisions regarding the allocation of public funds.
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