Column | Why the States’ 41% Share of Central Taxes Is Less Than It Seems

On 7 August 2026, the Tamil Nadu Assembly passed a resolution that its own recent history made striking. Barely three months earlier, an election had ended the DMK’s long rule and made the actor-turned-politician Vijay the Chief Minister. Yet the new House, led by his Tamilaga Vettri Kazhagam, asked the Centre for the same thing its predecessor had demanded: a fairer share of central taxes, matched to what each state contributes and needs. Winners and losers voted for it alike. The government in Chennai had changed hands. The grievance behind the resolution had not. 

That grievance rests on a figure that sounds settled. On 1 February 2026, the Union government tabled the report of the Sixteenth Finance Commission in Parliament, and within the hour a single number led every bulletin. For the five years from 2026-27, the states would keep 41% of the divisible pool of central taxes, the very share the Fifteenth Finance Commission had fixed. The commission, chaired by Arvind Panagariya, had held the line, and much of the coverage read that as continuity and stability, proof that the states had lost no ground. 

The number is accurate. For a state treasury, it means far less than it sounds. 41% of what? Of the divisible pool, which is not the money the Centre actually collects. The distance between what the Centre earns and what it agrees to divide is where a decade of quiet centralisation has happened, with no amendment to the Constitution and no order from any court to mark it. The Union promised the states a fixed share, then kept shrinking the base to which that share applied. 

What a cess is, and why it never reaches 

Two lines of the Constitution open that gap. Article 270 defines the divisible pool, the central taxes the Centre must divide with the states on the formula the Finance Commission sets, and the same article quietly leaves two things out: a surcharge levied under Article 271, and any cess raised for a stated purpose. Article 271 then says it in plain words. A surcharge on central taxes belongs entirely to the Union, and the states draw nothing from it. 

The taxpayer notices none of this. A cess and a surcharge leave the same wallet as every other tax, drawn from the same fuel bills and the same imports. The difference lives in the government’s ledger, and it is large. When the Centre raises a rupee of income tax, about 41 paise travel to the states; raise that same rupee as a cess, and the whole of it stays in Delhi. The name on the levy changes, the taxpayer pays the same, and the states lose their cut. The letter of the law holds. The spirit of cooperative federalism does not. 

The framers never meant cesses to work this way. They built them to be narrow and temporary, tied to a named job, an education cess for schools or a road cess for roads. The Constitution (Eightieth Amendment) Act, 1999, in force from 2000 and drawn from the Tenth Finance Commission’s recommendation, pooled central taxes for sharing so that no state would starve whenever the Centre chose to grow one tax over another. The exclusion of cesses was the fine print of a generous idea. Over a decade, the fine print has swallowed the idea. 

The ledger, read back to the Centre 

The scale is not a matter of opinion, because the Centre’s own receipts record it. Read from the Union budget documents, cesses and surcharges came to about 10.4% of gross tax revenue in 2011-12. Over the next decade that share roughly doubled, peaking at 20.2% in 2020-21, as the Centre leaned on fuel cesses in particular. It has since eased to about 14.5% in 2023-24, still well above where it began, and still, by law, the Centre’s alone to keep. 

Set against those numbers, the headline share thins out. The divisible pool is what survives after cesses, surcharges and collection costs come off the top. So, when the states take 41% of that smaller pool, their share of what the Centre truly collects lands closer to a third than to two-fifths. The commission gives away 41% of a cake the Union has already sliced. Both things are true at once, and the design intends them to be: a state can keep the promise on paper and still take home less than it did ten years ago. 

The record holds a sharper insult. The states might accept the trade if the cess money at least paid for what Parliament had authorised. It does not. Auditing 2018-19, the Comptroller and Auditor General found that of nearly Rs 2.75 lakh crore raised from 35 cesses and levies, the Centre had moved barely 60% to the reserve funds meant to hold it, and had parked the rest in the Consolidated Fund for everyday spending. On the education cess alone, the auditors traced tens of thousands of crores lying unspent. The purpose named on each cess was the justification for levying it. The purpose was also, in large part, a fiction. 

Who pays, and why the South says so loudest 

The squeeze falls hardest not on the poorest states but on the fastest-growing ones, judged by the Centre’s own yardsticks. At a conclave of state finance ministers in Thiruvananthapuram on 12 September 2024, Tamil Nadu’s then Finance Minister, Thangam Thennarasu, urged the states to “collectively advocate for a 50% share in the central tax devolution” and asked the Sixteenth Finance Commission to build “a mechanism to restrict the use of cess and surcharges”. He put Tamil Nadu’s loss from falling devolution at Rs 3.57 lakh crore, equal to 43% of the state’s outstanding debt. Tamil Nadu, whose debt has since climbed past Rs 10 lakh crore, has the sharpest reason to count, and its August 2026 resolution carried that arithmetic across party lines into settled state policy. 

Karnataka has fought on the same ground. Its Congress government ran a “My Tax My Right” campaign against the Centre’s arithmetic, and Krishna Byre Gowda, then the state’s Revenue Minister, invited Union Finance Minister Nirmala Sitharaman to an open debate on devolution. Kerala took the argument to court. It contended that the Centre’s ceiling on state borrowing breaches Article 293 and the state’s financial autonomy. On 1 April 2024, the Supreme Court refused interim relief but referred the suit to a five-judge Constitution Bench, whose eventual ruling will set how far the Union can reach into a state’s finances. 

The way the pool is split sharpens the resentment. The Finance Commission tilts the formula towards the distance between a state’s income and the richest state’s, so the more a state prospers, the less it draws from the pool. Uttar Pradesh alone now takes more from the pool than all five southern states combined. In their own submissions the southern states pressed for a 60% share, above even the 50% floor they had backed together at Thiruvananthapuram, and they read the 41% as a settlement written for others and paid for by them. 

The Sixteenth Finance Commission did answer part of this. It gave a 10% weight to a state’s contribution to national output, the first time the formula has rewarded what a state produces, and it dropped the small weight it once placed on tax effort, a gesture to the productive states. But those changes only move money between states, the horizontal split. They do nothing about why the 41% buys less each year, because the Centre settles that prior question in its budget, before the commission ever opens its file. 

What no Finance Commission can fix 

Here lies the trap for a body like Panagariya’s. The Finance Commission is the constitutional referee of fiscal federalism, and every five years it absorbs the blame for the size of the states’ share. Yet the decision that matters, whether to raise money as a shareable tax or as a non-shareable cess, rests with the Union in its annual budget, beyond the commission’s reach. The commission only divides what it is handed. The Centre decides, in advance and to no fixed formula, how much there is to hand over. The referee takes the blame for a result settled before the game begins. 

None of this breaks the law. Article 271 lets the Union keep its surcharges, Article 270 keeps cesses out of the pool, the Sixteenth Finance Commission has granted the states their 41%, and the government has accepted it, even promising to publish devolution figures every year. Everyone has followed the Constitution. What no one has secured is the single thing a state needs to run its schools, clinics and roads: a dependable and growing share of the taxes its own people send to Delhi. 

Cesses were meant to be rare. They have become the main lever by which the Union keeps what it wants and passes on only what is left. The states will go on hearing that they receive 41%, and the figure will stay true while it stands for a little less each year. The most misleading number in the Union budget is not a lie. It is a correct figure tied to something that keeps shrinking, and until the base itself is protected, no share the commission grants will hold its value. 

(Views expressed by the authors are personal)