15th Finance Commission's tax share rejig boosts Bihar, Maharashtra; Karnataka hit

New Delhi: Seven states have seen their share of the divisible tax pool shrink, while 21 have gained under the 15th Finance Commission’s 2021–26 award compared with the previous allocation, finance ministry data showed. Karnataka faced one of the sharpest cuts, with its share dropping from 4.713% in the 14th Finance Commission (2015-20) to 3.647%.

The divisible pool is that portion of gross tax revenue that is distributed between the Centre and the states. The divisible pool consists of all taxes, except surcharges and cess levied for specific purpose, net of collection charges.

Kerala’s allocation fell from 2.5% to 1.925%, and Andhra Pradesh’s from 4.305% to 4.047%. Assam, Odisha, Telangana, and the country's most populous state Uttar Pradesh also saw reductions. However, Uttar Pradesh’s dip, from 17.959% to 17.939%, was marginal.

In contrast, 21 states gained. Bihar’s share rose from 9.665% to 10.058%, Maharashtra’s from 5.521% to 6.317%, Rajasthan’s from 5.495% to 6.026%, and West Bengal’s from 7.324% to 7.523%.

Smaller states such as Arunachal Pradesh, Himachal Pradesh, Nagaland, Sikkim, and Tripura, also recorded the largest proportional increases.

To be sure, the Finance Commission determines each state’s share of tax devolution by evaluating factors such as population, income, area and demographic performance, assigning specific weights to these criteria to calculate the final percentage allocation.

“It is the prerogative of the Finance Commission to decide the criteria for recommending inter se tax shares from overall tax devolution for each State. This power of the Commission is given in Article 280(3)(a) of the Constitution of India,” the ministry of finance recently said in a written response to a question in the Rajya Sabha.

“Depending upon the parameters chosen by the Finance Commission and the weightages assigned, the percentage share of the taxes received by the states varies from one Finance Commission period to another,” it added.

Meanwhile, the Arvind Panagariya-led 16th Finance Commission is currently reviewing detailed submissions from states and central ministries to finalize its 2026–31 recommendations by 31 October, a verdict that will shape the fiscal landscape for the next five years (2027-31), deciding which states enjoy greater spending room and which must operate under tighter constraints.

The 16th Finance Commission, like its predecessors, is tasked with recommending how central tax revenues should be divided between the Centre and the states (vertical devolution), and how that share should be distributed among states (horizontal devolution).

It will also assess funding needs for disaster management and for strengthening local governments.

Speaking to Mint, in an interview last month, Manoj Panda, a member of the 16th Finance Commission, said that the commission has just completed several rounds of state visits, and may have to go "a bit beyond" the standard parameters while computing the share of the country's revenue kitty between states and the Centre.

He added that the states’ tax-to-GSDP (gross state domestic product) ratios have remained stuck at 6-7% levels and that future tax collections will primarily hinge on GSDP growth.

To be sure, there is a growing demand from wealthier Indian states, typically bunched around the western and southern regions, to be given a bigger share of the revenue.

Richer states have pressed the 16th Finance Commission to factor in their outsized contribution to national growth and tax revenues when determining horizontal allocations, arguing that the current formula fails to adequately reward their stronger economic performance despite their disproportionate share in GDP and tax collections.