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The cardinal authorities shares its gross taxation revenues with States based connected the recommendations of successive Finance Commissions (FCs), which find some the wide stock to States and the look for taxation devolution. The Centre besides transfers resources done grants-in assistance and centrally sponsored schemes (CSS). While the recommendations of 15 FCs person been implemented, those of the 16th FC person yet to beryllium tabled successful Parliament.
Central transfers person go a taxable of aggravated debate. Key concerns see the erosion of the fiscal autonomy of States pursuing the implementation of Goods and Services Tax (GST), gross losses arising from GST complaint cuts, the expanding dominance of CSS that constraint State-level spending flexibility, the Centre’s increasing cesses and surcharges that are not shared with States, and declining devolution shares of high-performing States. Moreover, astir FCs person prioritised equity implicit efficiency, having relied heavy connected debatable criteria specified arsenic income region and population, and often altered the weights assigned to these variables. Significant determination disparities besides persist crossed States successful expenditure needs and fiscal capacity.
Tax postulation versus taxation contribution
States specified arsenic Karnataka, Maharashtra and Tamil Nadu reason that they lend disproportionately to cardinal taxation revenues but person comparatively smaller shares done taxation devolution. This claim, however, is often contested connected the grounds that nonstop taxation figures bespeak the determination of collections alternatively than the existent spot wherever income is generated. Individuals and companies whitethorn wage taxes successful locations antithetic from wherever economical enactment occurs.
For example, automobile manufacturers successful Tamil Nadu whitethorn merchantability vehicles crossed India, but their taxation payments are recorded successful the State wherever their registered bureau is located. Similarly, plantation companies successful Kerala gain profits nationwide, though taxes are paid successful Kerala.
Therefore, jurisdiction based connected PAN information fails to accurately seizure State-wise contributions to nonstop taxes. This is owed to the beingness of multi-State firms, labour migration, impermanent oregon multi-location enactment arrangements, and the lack of elaborate information connected inter-State transactions among associated enterprises. Therefore, an indirect and much reliable proxy is needed to estimation the accrual of cardinal taxes astatine the State level.
GSDP arsenic proxy for State-level taxation accrual
Although the Centre levies nonstop taxes, Gross State Domestic Product (GSDP) represents the underlying taxation basal wrong each State. If taxation medication ratio is broadly azygous crossed States and the ratio of nonstop taxation gross to GSDP does not alteration significantly, a State’s stock successful nationalist GSDP tin reasonably approximate its publication to cardinal taxation revenues. Since the GST is destination-based and the main root of indirect taxation, its attribution crossed States is comparatively uncontroversial.
Empirical grounds supports this approach. Using 2023-24 data, the correlation betwixt States’ GSDP and nonstop taxation collections is 0.75, portion the correlation betwixt GSDP and GST collections is arsenic precocious arsenic 0.91. This beardown narration suggests that GSDP stock is simply a meaningful indicator of the accrual of cardinal taxes astatine the State level.
From 2020-21 to 2024-25, the Centre devolved 41% of its gross taxation revenues to States successful enactment with the 15th FC’s recommendations, on with further transfers done grants-in-aid and CSS. According to the Ministry of Finance (Rajya Sabha Unstarred Question No. 236, dated December 2, 2025), full transfers during this five-year play amounted to ₹ 75.12 lakh crore (see Table).
Uttar Pradesh received the largest stock of transfers (15.81%), followed by Bihar (8.65%), and West Bengal (6.96%). However, these States accounted for lone 4.6%, 0.67% and 3.99%, respectively, of combined nonstop taxation and GST collections. In contrast, Maharashtra contributed the highest stock of taxation collections (40.3%), but received lone 6.64% of full transfers. Karnataka and Tamil Nadu contributed 12.65% and 7.61%, portion receiving 3.9% and 4.66%, respectively. Haryana (1.1%), Himachal Pradesh (1.58%) and Uttarakhand (1.65%) received debased shares of transfers, contempt contributing 5.39%, 0.43% and 0.81%, respectively.
The 15th FC’s devolution shares amusement an astir cleanable correlation (0.99) with existent transfers implicit the five-year period, but a anemic correlation (0.24) with taxation postulation shares. By contrast, GSDP shares show a precocious correlation with taxation collections (0.81) and a mean correlation with devolution shares (0.58). This suggests that GSDP strikes a equilibrium betwixt efficiency, by reflecting taxation contributions, and equity, by allowing redistribution.
Only successful Haryana, Karnataka and Maharashtra, the GSDP stock is little than taxation postulation share, apt owed to the concentrations of registered offices of multi-State firms. In Tamil Nadu, GSDP stock exceeds taxation collections, reflecting accumulation enactment whose taxation payments are recorded elsewhere.
Gainers, losers nether a GSDP-based formula
If full cardinal transfers were distributed purely connected the ground of GSDP shares, 9 of the 20 large States would gain. Maharashtra, Gujarat, Karnataka and Tamil Nadu would payment the most, portion Uttar Pradesh, Bihar and Madhya Pradesh would acquisition the largest reductions. Importantly, these gains and losses would beryllium moderate, arsenic GSDP shares disagree little sharply from taxation postulation shares than existent devolution outcomes.
A higher value for GSDP stock would amended bespeak the accrual of cardinal taxation revenues, admit the contributions of States to nationalist income, and amended the perceived fairness and the credibility of India’s inter-governmental fiscal transportation system.
K.R. Shanmugam is Economic Consultant, Government of Tamil Nadu, and erstwhile Director, Madras School of Economics. Sankarganesh Karuppiah is an IRS officer. The views expressed are personal
