The 16th Finance Commission’s report, slated for October, may recommend states to opt for more revenue mobilising measures citing a slowdown in such steps since their share in the net proceeds of Union taxes were increased to over 40 percent, a government official told Moneycontrol.
The commission is expected to come out with a report by October 31, covering a period of five years from April 2026.
“States’ performance in mobilising revenues have been lacklustre, we have seen a connect when devolution was less their tax revenues to GDP were higher, after the devolution increased to over 40 percent this has reduced. So, they have not been mobilising revenues since devolution got higher. This will be highlighted,” the official cited above said.
As per the recommendation of the 15th Finance Commission, presently 41 percent of the divisible tax pool of the Centre is transferred to states in 14 instalments annually, covering the five-year period of 2021-22 to 2025-26.
States’ share in the divisible pool witnessed a massive increase after the 14th Finance Commission recommended 42 percent covering the period of April 2015 to March 31, 2020, a huge jump from 32 percent earlier.
To be sure, while about 60 percent of overall government expenditure in the country is through states, they have limited discretion in raising revenue and planning expenditure.
The finance ministry did not respond to a mail seeking comments on this development.
According to PRS Legislative Research, in 2024-25, states are estimated to raise 58 percent of their revenue receipts from own tax and non-tax sources while 42 percent is estimated to come from devolution of central taxes and grants from the Centre.
In 2024-25, states on aggregate have estimated their own tax to GSDP ratio at 7 percent, PRS Legislative Research however points out that this may be an overestimate since in 2022-23, Uttar Pradesh’s own tax to GSDP ratio was 7.7 percent, as against a budget estimate of 10.3 percent.
States on an average raised 11 percent less revenue than their budget estimates between 2015-16 and 2022-23, with Manipur, Andhra Pradesh showing relatively higher shortfalls, while Karnataka was the only state that met its target in this period.
In 2024-25, states have budgeted revenue receipts at 14.3 percent of GDP, substantially higher than in 2023-24 (13.3 percent of GDP as per provisional accounts). Similarly, revenue expenditure and capital outlay are budgeted to increase significantly over the provisional actuals of 2023-24.
But on an average, states have also underspent compared to their budget estimates by 10 percent between 2015-16 and 2022-23. One of the reasons for such underspending could be attributed to the shortfall in revenue collection, PRS Legislative Research adds.
Moneycontrol had reported earlier that the Centre is pushing for a higher share in the divisible pool of taxes as it looks to lower its borrowings from the bond market and curtail its fiscal deficit to 4.4 percent of the GDP by 2025-26.
Finance commissions are tasked to recommend distribution of the net proceeds of taxes between the Centre and the states and the allocation between the states of the respective shares of such proceeds, among others.
The 16th Finance Commission is chaired by Arvind Panagariya, the former vice-chairman of the Centre's think-tank NITI Aayog and a professor of Columbia University.
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