12 Feb 2026·Source: The Hindu

4 min

Polity & GovernanceEconomyNEWS

Finance Minister Asserts States' Tax Share Unchanged Amid Opposition Claims

Finance Minister clarifies that States receive mandated 41% tax devolution.

Finance Minister Nirmala Sitharaman refuted claims that the Centre isn't transferring the mandated 41% of the divisible tax pool to States, as recommended by the 15th Finance Commission. She assured that the required transfers are made annually. Sitharaman highlighted that total resources transferred to States, including devolution and centrally sponsored schemes, are estimated at ₹25.44 lakh crore for 2026-27, an increase of ₹2.7 lakh crore over 2025-26.

She explained that the CAG audits the Centre's finances to determine net proceeds after subtracting cesses and surcharges. The Finance Minister also addressed concerns about the Centre increasing cesses and surcharges, clarifying they are for specific purposes like health and education, benefiting States.

Key Facts

The 15th Finance Commission recommended that the Centre transfer 41% of its divisible pool of taxes to the States for 2020-2026.

The Finance Minister assured that the required transfers are made every year.

Total resources to be transferred to the States, including devolution and centrally sponsored schemes, are estimated at ₹25.44 lakh crore for 2026-27.

This entails an increase of ₹2.7 lakh crore over 2025-26 and is ₹3.78 lakh crore more than the actuals of 2024-25.

The CAG audits the Centre’s finances and decides what the net proceeds of the Centre are.

UPSC Exam Angles

GS Paper II: Polity and Governance - Federalism, Centre-State Relations

GS Paper III: Economy - Government Budgeting, Fiscal Policy

Potential question types: Statement-based, analytical questions on fiscal federalism and the role of the Finance Commission

Visual Insights

Key Figures from Finance Minister's Statement

Highlights of the Finance Minister's statement on resource transfers to states.

Estimated Total Resources Transferred to States (2026-27): ₹25.44 lakh crore
Increase in Resource Transfer over 2025-26: ₹2.7 lakh crore
Share of Divisible Tax Pool Transferred to States: 41%

More Information

Background

The financial relationship between the Union and the States in India is governed by constitutional provisions and recommendations from the Finance Commission. The Constitution of India, under Part XII, Articles 268 to 293, deals with the financial relations between the Centre and the States. These articles outline the distribution of tax revenues, grants-in-aid, and borrowing powers. The Finance Commission, a constitutional body established under Article 280, plays a crucial role in recommending the principles governing the distribution of tax proceeds between the Union and the States. The recommendations of the Finance Commission are generally advisory in nature, but they carry significant weight and are usually accepted by the government. The 15th Finance Commission, whose recommendations are currently in effect, suggested that 41% of the divisible tax pool be allocated to the States. Cesses and surcharges are additional taxes levied by the Union government for specific purposes. Unlike other taxes, the revenue generated from cesses and surcharges is typically retained by the Union and is not shared with the States. This has often been a point of contention between the Centre and the States, with States arguing that the increasing reliance on cesses and surcharges reduces their share of the overall tax revenue. The Comptroller and Auditor General of India (CAG) audits the accounts of the Union and the States, ensuring financial accountability and transparency.

Latest Developments

The Finance Minister's recent assertion comes amidst ongoing discussions about fiscal federalism and the financial autonomy of States. States have been advocating for a greater share of central taxes and increased flexibility in utilizing funds for their developmental needs. The COVID-19 pandemic further strained the financial resources of both the Centre and the States, leading to increased borrowing and fiscal deficits. The Goods and Services Tax (GST), implemented in 2017, has also impacted the revenue streams of States, with the Centre providing compensation for any revenue shortfall. Recent trends indicate a growing emphasis on cooperative federalism, with the Centre and the States working together to address common challenges and achieve shared goals. Institutions like the NITI Aayog play a crucial role in fostering collaboration and promoting evidence-based policy making. The debate surrounding cesses and surcharges is likely to continue, with States seeking greater transparency and a more equitable distribution of tax revenues. The upcoming budget and the next Finance Commission will be critical in shaping the future of Centre-State financial relations. Looking ahead, the focus is expected to be on enhancing fiscal discipline, promoting sustainable growth, and ensuring that resources are allocated efficiently to meet the developmental needs of all States. The Centre and the States will need to work together to address issues such as climate change, infrastructure development, and social welfare, requiring a collaborative and coordinated approach to financial management.

Frequently Asked Questions

1. What percentage of the divisible pool of taxes is the Centre mandated to transfer to the States, as per the 15th Finance Commission?

As per the 15th Finance Commission's recommendation, the Centre is mandated to transfer 41% of the divisible pool of taxes to the States.

Exam Tip

Remember the 41% figure for Prelims. It's a frequently tested fact related to fiscal federalism.

2. What is the divisible pool of taxes, and why is it important for fiscal federalism in India?

The divisible pool of taxes refers to the portion of central government tax revenues that is shared with the states. It is a crucial aspect of fiscal federalism, ensuring states have adequate resources for development and welfare activities. The Finance Commission recommends the principles governing this distribution.

3. What are cesses and surcharges, and how do they impact the divisible pool of taxes?

Cesses and surcharges are taxes levied by the central government for specific purposes. Revenue from cesses and surcharges is not part of the divisible pool and is retained entirely by the Centre, which can be a point of contention with States.

4. Why has the Finance Minister clarified the issue of tax devolution to States recently?

The Finance Minister clarified the issue due to claims that the Centre wasn't transferring the mandated 41% of the divisible tax pool to States. The clarification aimed to assure States that the required transfers are being made annually.

5. What role does the Comptroller and Auditor General (CAG) play in the context of tax devolution to States?

The CAG audits the Centre’s finances to determine the net proceeds of taxes after subtracting cesses and surcharges. This audit is crucial for calculating the divisible pool of taxes that is to be shared with the States.

6. What is the estimated total resource transfer to States for 2026-27, and how does it compare to previous years?

Total resources to be transferred to the States, including devolution and centrally sponsored schemes, are estimated at ₹25.44 lakh crore for 2026-27. This is an increase of ₹2.7 lakh crore over 2025-26.

7. What are the potential implications if the Centre reduces the share of divisible taxes transferred to States?

Reducing the share of divisible taxes could strain the financial resources of States, potentially impacting their ability to fund developmental and welfare programs. It could also lead to tensions between the Centre and States regarding fiscal autonomy.

8. How do Centrally Sponsored Schemes affect the overall resource transfer to States?

Centrally Sponsored Schemes (CSS) contribute significantly to the overall resource transfer to States, in addition to the tax devolution. The total resources transferred include both the divisible pool of taxes and funds allocated under CSS.

9. What are some arguments States might use to advocate for a larger share of central taxes?

States might argue for a larger share based on their developmental needs, fiscal responsibilities, and the need to address regional disparities. They might also highlight their role in implementing key government programs and contributing to the national economy.

10. What is the period for which the 15th Finance Commission's recommendations are applicable?

The 15th Finance Commission's recommendations are applicable for the period from 2020 to 2026.

Practice Questions (MCQs)

1. Consider the following statements regarding the Finance Commission in India: 1. It is a constitutional body established under Article 280 of the Constitution. 2. Its recommendations are binding on the Union Government. 3. The 15th Finance Commission recommended that 41% of the divisible tax pool be allocated to the States. Which of the statements given above is/are correct?

A.1 and 2 only
B.1 and 3 only
C.2 and 3 only
D.1, 2 and 3

Show Answer

Answer: B

Statement 1 is CORRECT: The Finance Commission is indeed a constitutional body established under Article 280 of the Constitution. Statement 2 is INCORRECT: The recommendations of the Finance Commission are advisory in nature and not binding on the Union Government. The government can accept or reject these recommendations. Statement 3 is CORRECT: The 15th Finance Commission recommended that 41% of the divisible tax pool be allocated to the States. This was mentioned in the news summary.

2. Which of the following statements best describes the role of the Comptroller and Auditor General of India (CAG) in the context of Centre-State financial relations?

A.The CAG determines the percentage of tax revenue to be devolved to the States.
B.The CAG audits the accounts of the Union and the States, ensuring financial accountability and transparency.
C.The CAG advises the government on fiscal policy matters.
D.The CAG is responsible for implementing centrally sponsored schemes.

Show Answer

Answer: B

Option B is the correct answer. The Comptroller and Auditor General of India (CAG) is primarily responsible for auditing the accounts of the Union and the States. This ensures financial accountability and transparency in government spending. The CAG's reports are then presented to the Parliament and State Legislatures, which can then take action based on the findings. The news summary mentions that the CAG audits the Centre's finances to determine net proceeds after subtracting cesses and surcharges. Options A, C, and D are incorrect as they describe functions that are not within the CAG's mandate. The Finance Commission determines the tax revenue devolution, the government is advised on fiscal policy by various bodies, and centrally sponsored schemes are implemented by government departments.

3. Assertion (A): States have often raised concerns about the increasing reliance of the Union Government on cesses and surcharges. Reason (R): The revenue generated from cesses and surcharges is typically retained by the Union and is not shared with the States. In the context of the above statements, which of the following is correct?

A.Both (A) and (R) are true and (R) is the correct explanation of (A).
B.Both (A) and (R) are true but (R) is NOT the correct explanation of (A).
C.(A) is true but (R) is false.
D.(A) is false but (R) is true.

Show Answer

Answer: A

Both the assertion and the reason are true, and the reason correctly explains the assertion. States are indeed concerned about the increasing use of cesses and surcharges by the Union Government because the revenue from these sources is not shared with them, reducing the overall divisible pool of taxes available to the States. The news summary explicitly mentions this point.