Greater share: on States and central taxes

Prime Minister Narendra Modi’s exhortation to the Chief Ministers gathered at the 10th Governing Council Meeting of NITI Aayog over the weekend, in New Delhi, that the Centre and States should come together as “Team India” to propel the country forward, is a good sentiment; but, it belies reality. The Centre-States relationship right now is a one-way street, with the Centre resorting to the stick, and, occasionally, to the carrot method, to make the States comply with its wishes. The States are finding it increasingly difficult to voice their often genuine and serious grievances at the national level since federal bodies such as the NITI Aayog Governing Council or the Goods and Services Tax (GST) Council do not meet often. Meeting once a year is not nearly enough for the Governing Council of a body whose very first objective is to develop a “shared vision of national development priorities”. The GST Council, too, has not met in more than five months, when regulations say it should meet at least once a quarter. So, when the States do get a chance to speak at the national level, as they did on Saturday, most have no choice but to focus on their individual problems or achievements rather than on a collaborative ‘Team India’ approach. There were, however, some notable deviations where Chief Ministers looked beyond their States’ borders in an attempt to drive national growth. One was Andhra Pradesh Chief Minister N. Chandrababu Naidu’s proposal for the creation of three sub-groups of States to focus attention on the issues of GDP growth and investments, leveraging India’s demographic bounty, and using technology to drive governance. Sub-groups are a good way for the Centre to bring States on board, if it finds a body comprising all States to be too unwieldy.

The most notable pan-India suggestion was probably Tamil Nadu Chief Minister M.K. Stalin’s call for the Centre to share 50% of its tax revenue with the States, up from the current formula of 41%. This is an issue that certainly requires more discussion. The implicit condition behind the Centre providing States compensation for any losses arising out of GST for five years was that the States would use this time to bolster their own tax revenues. While progress on this has been patchy — with some States doing far better than others — it has nevertheless been significant. The States’ combined own tax revenues as a percentage of Gross State Domestic Product (GSDP) grew from 6.6% in 2017-18 to 7.2% in 2024-25. On the other hand, GST has failed to live up to its potential, with net revenues only recently surpassing pre-GST indirect tax levels. Since GST subsumed many of the States’ levies, it seems only fair that the Centre seriously consider their demand for a bigger share in central taxes.