Has the 16th Finance Commission sidelined the States and prioritised the Centre’s needs?
The Hindu
The 16th Finance Commission (FC)’s vertical devolution recommendations prioritise the needs of the Centre over the realities of States. By merely acknowledging, rather than heeding, States’ fiscal pressures, the FC has taken a distinctly conservative stance. By favouring cesses and surcharges over standard tax instruments, the Centre effectively shrinks the shareable revenue; conversely, a shift back to traditional taxation would expand it.
The 16th Finance Commission (FC)’s vertical devolution recommendations prioritise the needs of the Centre over the realities of States. By merely acknowledging, rather than heeding, States’ fiscal pressures, the FC has taken a distinctly conservative stance.
To grasp the underlying tensions, we must first look deeper into the structural issues. The 16th FC has maintained the vertical devolution rate at 41%, representing the States’ share of the divisible pool.
Crucially, this divisible pool excludes cesses, surcharges, and collection costs, meaning its total volume is dictated by the Centre’s tax strategy. By favouring cesses and surcharges over standard tax instruments, the Centre effectively shrinks the shareable revenue; conversely, a shift back to traditional taxation would expand it.
Data show the way the present regime has gone about it. The chart below is a simplified representation of the divisible pool.
Between 2013 and 2019, for every ₹100 collected by the Centre, about ₹93-95 was collected as taxes and duties that form the divisible pool; the remaining ₹5-7 was collected as cesses and surcharges, including the expenditure incurred in collecting these taxes. In 2021-22, for every ₹100 collected, ₹86.5 was collected as taxes and duties, while the cesses and surcharges component increased to ₹13.5.
For 2025-26, the Centre is expected to collect ₹89 as taxes and duties and ₹11 as cesses and surcharges. The GST compensation cess was not included in this analysis, as it was collected to compensate the States for revenue loss due to the implementation of GST.
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