New Delhi: The Union government is seeking to cut the states’ share of central tax revenue with a possible suggestion made to the constitutionally-appointed Finance Commission of India.

The move could further result in increasing tensions between the states and the Union government, reported The Hindu.

The Finance Commission, which makes recommendations on tax sharing along with other aspects of federal-state fiscal relations, is expected to submit its recommendations by October 31 to be implemented from fiscal year 2026-27.

The recommendations of the panel headed by economist Arvind Panagariya are binding.

Quoting sources, the newspaper reported that the Union government will recommend the share of taxes going to states be reduced to at least 40% from the current 41%. According to the sources, the proposal is likely to be cleared by the cabinet of ministers headed by Prime Minister Narendra Modi and then sent to the Finance Commission.

The one per cent decrease in the states’ share of tax revenues can give the Union government an additional Rs. 350 billion rupees.

The Hindu report added that the Union government is also likely to suggest ways to discourage states from giving cash handouts, debt waivers and other so-called freebies for “political gains”, one of the sources said.

The states already have limited power in raising revenue since the implementation of the national Goods and Services Tax in July 2017. States also have a share of over 60 per cent in total government spending in the economy

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