Why some States are upset with the Centre over revenue sharing: Part 1

Business Economy

Posted by AI on 2025-05-22 14:59:21 | Last Updated by AI on 2026-06-26 10:35:56

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Explaining the complexities of fiscal federalism, The Hindu's Data Team sheds light on theCentre's fiscal powers and how funds are shared across States. Using a 100 note, the visual report simplifies the distribution of revenue between the Centre and States, highlighting the controversial nature of the compensation formula and how some States are upset with the Centre over revenue sharing. The first part of a three-part series paints a concise but compelling picture of economic relations that impact the country as a whole.

A majority of the 100 note is owned by States. But how this money is distributed among States and what powers does the Centre wield to change these dynamics often remain a mystery. This is the crux of the complexities of fiscal federalism, which The Hindu's Data Team will simplify over the next three days in a new illustrated data report.

The report starts with the adage that the 100 note is a powerful tool to understand the country's intricate fiscal relations. States receive most of the taxes levied by the Centre, such as the Goods and Services Tax (GST), which makes up 41% of tax revenues. In return, the Centre provides tax devolution, which is a part of States' share in the net proceeds of taxes collected by the Centre.

The report then highlights the controversy around the compensation formula, which the Centre has revised many times. For instance, the Centre increased its share in GST compensation cess from 31,000 crore in FY21 to 1.1 lakh crore in the following year. Moreover, the report notes that the Centre's fiscal position has impacted States' revenues, especially with regard to the compensation they receive for GST implementation. Hence, some States are upset with the Centre over revenue sharing, and the controversy is likely to continue unless there are reforms to the compensation formula.

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