Introduction
When you pay GST (Goods and Services Tax), did you know where it actually goes?
SGST (State GST) → Goes directly to the state government
CGST (Central GST) → Goes directly to the central government
IGST (Integrated GST for interstate transactions) → Split between Centre and states
But apart from GST, income tax, corporate tax, excise duty, and customs duty are collected by the central government, and a portion of this is later shared with states.
Right now, states receive 41% of this central tax revenue, but the government is planning to reduce it to 40% from 2026-27. While 1% seems small, in actual numbers, states could lose ₹4.6 lakh crore over five years.
In this article, we take a 360-degree look at:
How India’s tax revenue is shared
Why the Centre wants to reduce states’ share
How this affects the common man
What states are saying and possible solutions
How Tax Revenue is Shared Between Centre and States
Understanding GST vs. Other Taxes
Not all taxes in India go into the same pool.
GST (Goods and Services Tax) → Automatically split between Centre and states
- SGST (State GST) – Goes entirely to the state government
- CGST (Central GST) – Goes entirely to the central government
- IGST (Interstate GST) – Shared between Centre and states
Other taxes like income tax, corporate tax, excise duty, and customs duty are collected only by the Centre, and a portion of this is later shared with states.
The proposed reduction from 41% to 40% applies only to this central tax revenue—not GST.
How Big is the 1% Reduction?
| Category | Amount (₹ lakh crore) |
|---|---|
| Total Tax Revenue | 46.15 |
| States’ Current Share (41%) | 18.92 |
| Proposed Share (40%) | 18.46 |
| Revenue Loss for States | 0.46 (₹46,000 crore per year) |
Over a 5-year period, this would add up to ₹4.6 lakh crore less for states.
Why is the Centre Reducing States’ Share?
The government has three main reasons for this decision:
Rising Federal Expenses
The Centre argues that it needs more funds to finance big-ticket projects, such as:
Infrastructure expansion (highways, railways, airports)
Defense modernization (India’s military budget is increasing)
Social welfare programs (free ration schemes, health insurance for the poor)
Reducing Fiscal Deficit
India’s fiscal deficit (the gap between income and spending) is projected to be 5.1% of GDP in 2026-27. The Centre wants to reduce this gap by keeping more tax revenue instead of borrowing more.
Rationalizing State Allocations
Some developed states (like Maharashtra, Tamil Nadu, and Karnataka) argue that poorer states receive a disproportionate share of tax devolution. The Centre believes a lower devolution percentage and more performance-based incentives could ensure better fund allocation.
How This Affects States and the Common Man
Since states depend on tax transfers from the Centre, reducing their share will impact their ability to fund public services. Here’s how it affects you:
Higher Fuel Prices in Some States
States reduce fuel taxes to make petrol and diesel cheaper. But with less revenue, they might increase fuel taxes.
Example: If Tamil Nadu increases state VAT on fuel by ₹2 per liter, petrol prices could rise from ₹100 to ₹102.
Cuts in Freebies and Welfare Schemes
Many state-funded programs, like free school uniforms, midday meals, and pension benefits, may be scaled back.
Example:
- Karnataka’s Gruha Lakshmi Scheme (₹2,000 for women) may get reduced or delayed
- Tamil Nadu’s Free Laptop Scheme for Students may be postponed
Increase in Property Tax and State GST
Since states won’t receive as much revenue, they might increase property taxes or hike state GST rates to recover funds.
Example: A Bengaluru resident currently pays ₹5,000 per year in property tax. This could increase to ₹6,000 or more.
Slower Road and Infrastructure Development
State governments fund metro expansions, road repairs, and public transport. With reduced funds, these projects may slow down.
Example: Chennai Metro expansion might be delayed by a year due to budget constraints.
How States Are Reacting
Many states are strongly opposing this move, arguing that it:
Weakens fiscal federalism
Increases financial dependence on the Centre
Forces states to take more loans, increasing debt burdens
Political Reactions So Far
- Kerala, Tamil Nadu, West Bengal: Strongly opposed and may legally challenge the proposal.
- BJP-ruled states (UP, MP, Gujarat): Less vocal opposition but may push for performance-linked incentives.
- Opposition Leaders: Claim this is an “attack on state autonomy” and a political move to control state finances.
What Are the Alternative Solutions?
Instead of reducing tax devolution, the government could:
1. Implement Performance-Based Incentives
- Reward states with higher tax efficiency and better financial discipline.
2. Expand the GST Revenue Pool
- Improve GST compliance, plug tax evasion, and broaden the GST base to generate more revenue.
3. Differentiate Tax Devolution by Economic Strength
- Instead of a flat 1% cut, make wealthier states receive slightly less, while poorer states receive more.
4. Increase Special Purpose Grants
- Instead of reducing the tax share, the Centre could divert more funds into targeted schemes like education, healthcare, and infrastructure.
Conclusion: What’s Next?
Less tax share for states = budget cuts, higher local taxes, slower development
More money for the Centre = bigger national projects but reduced financial independence for states
The final decision will be made in Budget 2026, based on 16th Finance Commission recommendations. Until then, expect more debates, political resistance, and possible adjustments to the policy.
What do you think? Should the Centre reduce states’ tax share, or should it find alternative revenue sources? Let’s discuss!
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