The divisible pool of Centre’s GTR, that is available to the States for devolution, is derived by subtracting the cess and surcharges, and taxes accruing to the Union Territories from the GTR

The recently tabled Sixteenth Finance Commission (FC-16) report has renewed focus on how India shares tax revenues between the Centre and States. Data compiled from the FC-16 report and Union Budget trends show that while States’ devolution is gradually increasing, it still falls short of the spirit of higher fiscal empowerment implied in past commission debates.

Between 2021-22 and 2026-27 (BE), States’ share from the divisible pool of gross tax revenue (GTR) in absolute terms rose from about ₹8.83 lakh crore to ₹15.26 lakh crore. However, a businessline analysis shows that the ratio of the share fell from around 39.8 per cent of the divisible pool in 2021-22 to 38.7 per cent in 2026-27, lower than the recommended 41 per cent. The divisible pool of Centre’s GTR, that is available to the States for devolution, is derived by subtracting the cess and surcharges, and taxes accruing to the Union Territories from the GTR.

The States’ devolution as a share of GTR (including cesses and surcharges) as given by the FC-16, increased slightly from around 32.6 per cent in 2021-22 to 34.7 per cent in 2026-27 (BE). Over three decades, the share had climbed from roughly 25 per cent in 1991-92 to above 32 per cent in 2021-22.

Why the Centre falls short of higher devolution

The FC-16 records competing fiscal arguments from the Union and the States. The Centre argued that “significant increases in vertical devolution recommended by the FC‑7 and FC‑14 were premised on providing States with more untied resources. The increased untied transfers aim to strengthen the fiscal autonomy of the States, but this has not always translated into sustained fiscal prudence on their part.” Further emphasising its own spending pressures, the Centre “calls for moderation in tax devolution because it requires additional resources for defence modernisation and prudent macroeconomic management.”

On the other hand, “States argue that the Constitution has assigned a proportionately larger expenditure responsibility to States. To discharge these responsibilities, they need more resources.” A majority of States “highlighted the declining share of the divisible pool in the gross tax revenues of the Union and proposed measures to counter this trend. The measures included: (i) inclusion of cesses and surcharges in the divisible pool; (ii) capping their share as a percentage of gross tax revenue and transferring any amount above that cap to the divisible pool; and (iii) compensatory enhancement of States’ share in the divisible pool if these levies remain excluded.”

“As regards cesses and surcharges, the Union states that their exclusion from the divisible pool is by Constitutional design. The Union further argues that though not shareable, cesses often fund welfare and infrastructure schemes that benefit the States.”

The numbers behind the devolution debate

Incidentally, the total of cess and surcharges has reduced in 2025-26 and 2026-27, due to the rate rationalisations by the Centre, reducing the GST compensation cess to states from ₹1.5 lakh crore in 2024-25 to ₹88,000 crore in 2025-26, and doing away with the compensation cess completely in the budget of 2026-27.

Meanwhile, horizontal allocation continues to prioritise equity and population-linked criteria, historically assigning large weights to demographic size and income distance to equalise public service access across States. This disproportionately benefits populous states, such as Uttar Pradesh, Bihar, and Madhya Pradesh, which continue to command the largest shares.

Published on February 12, 2026