THIRUVANANTHAPURAM/LUCKNOW: A growing demand by states to raise their share of central taxes – tax devolution, to 50 per cent has lent fresh urgency to Kerala’s long-standing complaint over falling allocations from the Union government.
The 16th Finance Commission, which is currently touring states for consultations, heard from over 22 of the 28 states that the present 41 per cent tax devolution for states must be increased to half, its chairman Arvind Panagariya said on Wednesday in Lucknow.
At present, the Centre retains 59 per cent of the divisible tax pool. “Like most other states, Uttar Pradesh has also demanded that the share be increased to 50 per cent,” Panagariya said. He did not indicate whether the commission would accept this demand in its report due next October.
The commission’s recommendations will apply for the five-year period starting April 1, 2026.
The demand comes as Kerala continues to voice concern over what it calls a systemic reduction in its tax entitlement. The state’s share from the Centre’s divisible pool has dropped from 2.5 per cent during the 14th Finance Commission (2015–20) to 1.92 per cent under the 15th Finance Commission (2021–26).
Kerala CM steadfast on fairer share
Chief Minister Pinarayi Vijayan recently criticised the Centre for denying Kerala its due share. “In 2022–23 and 2023–24, Kerala accounted for 3.7 per cent of the total own tax revenue generated by all Indian states. But the state received just 1.53 per cent and 1.13 per cent of the Centre’s tax devolution in those years,” Vijayan said, adding that the rightful entitlement based on population share should have been 2.7 per cent.
He estimated that Kerala lost out on Rs2,282 crore in 2022–23 and Rs2,071 crore in 2023–24 due to the shortfall.
Although the convention has been to accept Finance Commission recommendations in full, Kerala has repeatedly sought a correction in the formula to better reflect its fiscal capacity, demographic transition, and development needs.
The Finance Commission, constituted under Article 280 of the Constitution, plays a crucial role in determining the vertical (Centre-state) and horizontal (state-state) distribution of tax revenues.
The Commission is expected to submit its recommendations by October 31, 2025.
