1. Share of States in Central Taxes
The 16th Finance Commission has recommended that states receive 41% of the divisible pool of central taxes — unchanged from the recommendation made by the 15th Finance Commission. The divisible pool is calculated by excluding the cost of collection, cesses, and surcharges from the gross tax revenue collected by the central government.
2. Criteria for Devolution
The Commission uses a weighted formula across several parameters to determine how central taxes are distributed among states. The table below compares the criteria and their respective weights under the 15th and 16th Finance Commissions:
| Criteria | 15th FC (2021–26) | 16th FC (2026–31) |
|---|---|---|
| Income Distance (Per Capita GSDP) | 45% | 42.5% |
| Population (2011 Census) | 15% | 17.5% |
| Demographic Performance | 12.5% | 10% |
| Area | 15% | 10% |
| Forest | 10% | 10% |
| Tax and Fiscal Efforts | 2.5% | — |
| Contribution to GDP (New) | — | 10% |
| Total | 100% | 100% |
Key Changes in Devolution Criteria
- Income Distance: Defined as the difference between a state’s per capita GSDP and the average per capita GSDP of the top three large states. Per capita GSDP is computed as an average over 2018–19 and 2023–24, excluding the pandemic year 2020–21. States with lower per capita GSDP receive a higher share, promoting equity.
- Population: Devolution share based on a state’s share in the population as per the 2011 Census. The weight has been increased from 15% to 17.5%.
- Demographic Performance: Previously measured by change in Total Fertility Rate (TFR), the 16th FC has redefined this parameter to account for population growth between 1971 and 2011. States with lower population growth over this period receive a higher share.
- Forest: The 16th FC now assigns weight to both a state’s share in overall forest area and its share in the increase in forest area between 2015 and 2023. Crucially, open forests are now also counted — unlike the 15th FC, which considered only dense and moderately dense forests.
- Contribution to GDP (New): This new parameter replaces the earlier “Tax and Fiscal Efforts” metric. A state’s contribution is measured as the square root of its GSDP divided by the sum of the square roots of all states’ GSDPs, using average nominal GSDP from 2018–19 to 2023–24 (excluding 2020–21).
3. Grants-in-Aid (2026–31)
The 16th FC has recommended total grants-in-aid worth ₹9,47,409 crore over the five-year period. These grants cover two broad categories: (i) local body grants and (ii) disaster management grants. Notably, the Commission has discontinued revenue deficit grants, sector-specific grants, and state-specific grants that were recommended by the 15th FC.
| Grant Type | Amount (₹ crore) |
|---|---|
| Local Governments (Total) | 7,91,493 |
| Rural Local Bodies — Basic Grant | 3,48,188 |
| Rural Local Bodies — Performance Grant | 87,048 |
| Urban Local Bodies — Basic Grant | 2,32,125 |
| Urban Local Bodies — Performance Grant | 58,032 |
| Special Infrastructure Component (ULB) | 56,100 |
| Urbanisation Premium (ULB) | 10,000 |
| Disaster Management | 1,55,916 |
| Grand Total | 9,47,409 |
Structure of Local Body Grants
All local body grants come with three mandatory entry-level criteria:
- constitution of local bodies as per the Constitution
- publication of provisional and audited accounts in the public domain
- timely constitution of the State Finance Commission.
Basic Grants: 50% of the basic grant is untied, while the remaining 50% is tied to sanitation and solid waste management, and/or water management.
Performance Grants: Divided into state performance grants (linked to minimum benchmark transfers to local bodies from own resources) and local body performance grants (linked to own source revenue growth).
Special Infrastructure Grants (₹56,100 crore): Tied to development of comprehensive wastewater management systems in cities with populations between 10–40 lakh as per the 2011 Census.
Urbanisation Premium Grants (₹10,000 crore): A one-time grant for merger of peri-urban villages into adjoining urban local body areas, and for formulating a Rural to Urban Transition Policy.
Disaster Management Grants: A corpus of ₹2,04,401 crore has been recommended for State Disaster Relief and Management Funds (SDRF and SDMF). The centre-state cost-sharing ratio is 90:10 for north-eastern and Himalayan states, and 75:25 for all other states. The centre’s share amounts to ₹1,55,916 crore.
4. Fiscal Roadmap
The Commission has recommended that the Centre bring its fiscal deficit down to 3.5% of GDP by 2030–31. For states, the annual fiscal deficit limit has been set at 3% of GSDP. Key fiscal discipline measures include:
- Strict discontinuation of off-budget borrowings by states, with all such borrowings to be brought on-budget.
- Expansion of the definition of fiscal deficit and debt to uniformly include all off-budget borrowings.
- The combined debt of the central and state governments is projected to decline from 77.3% of GDP in 2026–27 to 73.1% of GDP by 2030–31.
5. Power Sector Reforms
The Commission has recommended that states actively pursue the privatisation of electricity distribution companies (DISCOMs). To protect private investors from the debt burden upon DISCOM takeover, a Special Purpose Vehicle (SPV) may be created to warehouse the debt. States will be permitted to use funds from the Special Assistance Scheme for Capital Investment only after the privatisation process is complete.
6. Subsidy Expenditure Rationalisation
The Commission has called on states to review and rationalise their subsidy expenditure, noting that schemes offering unconditional cash transfers tend to have large and untargeted beneficiary bases. Key recommendations include:
- Setting clear exclusion criteria and a rigorous review process to improve targeting of subsidies.
- Discontinuing financing of subsidies through off-budget borrowings.
- Adoption of a uniform approach for accounting and disclosure of subsidies and transfers across states, addressing the current misclassification of subsidies as assistance, grants, or other expenditure.
7. Public Sector Enterprise (PSE) Reforms
The Commission recommended a review and closure of 308 inactive State Public Sector Enterprises (SPSEs). Further recommendations include:
- Formulation of a state-level PSE disinvestment policy targeting inactive and underperforming enterprises.
- Any state or union PSE incurring losses for three out of four consecutive years must be placed before the respective Cabinet, which may decide on closure, privatisation, or continuation based on strategic importance.
Top Individual State Shares (out of 100):
- Uttar Pradesh: 17.62
- Bihar: 9.95
- Madhya Pradesh: 7.35
- West Bengal: 7.22
- Maharashtra: 6.44
State-wise Data
Individual Share of States in Devolved Taxes (out of 100)
| State | 14th FC (2015–20) | 15th FC (2021–26) | 16th FC (2026–31) |
|---|---|---|---|
| Andhra Pradesh | 4.31 | 4.05 | 4.22 |
| Arunachal Pradesh | 1.37 | 1.76 | 1.35 |
| Assam | 3.31 | 3.13 | 3.26 |
| Bihar | 9.67 | 10.06 | 9.95 |
| Chhattisgarh | 3.08 | 3.41 | 3.30 |
| Goa | 0.38 | 0.39 | 0.37 |
| Gujarat | 3.08 | 3.48 | 3.76 |
| Haryana | 1.08 | 1.09 | 1.36 |
| Himachal Pradesh | 0.71 | 0.83 | 0.91 |
| Jharkhand | 3.14 | 3.31 | 3.36 |
| Karnataka | 4.71 | 3.65 | 4.13 |
| Kerala | 2.50 | 1.93 | 2.38 |
| Madhya Pradesh | 7.55 | 7.85 | 7.35 |
| Maharashtra | 5.52 | 6.32 | 6.44 |
| Manipur | 0.62 | 0.72 | 0.63 |
| Meghalaya | 0.64 | 0.77 | 0.63 |
| Mizoram | 0.46 | 0.50 | 0.56 |
| Nagaland | 0.50 | 0.57 | 0.48 |
| Odisha | 4.64 | 4.53 | 4.42 |
| Punjab | 1.58 | 1.81 | 2.00 |
| Rajasthan | 5.50 | 6.03 | 5.93 |
| Sikkim | 0.37 | 0.39 | 0.34 |
| Tamil Nadu | 4.02 | 4.08 | 4.10 |
| Telangana | 2.44 | 2.10 | 2.17 |
| Tripura | 0.64 | 0.71 | 0.64 |
| Uttar Pradesh | 17.96 | 17.94 | 17.62 |
| Uttarakhand | 1.05 | 1.12 | 1.14 |
| West Bengal | 7.32 | 7.52 | 7.22 |
Cities Eligible for Special Infrastructure Component (ULB Grants)
The following cities with populations between 10–40 lakh (2011 Census) are eligible for the Special Infrastructure Component under urban local body grants:
Pune (Maharashtra), Jaipur (Rajasthan), Lucknow (Uttar Pradesh), Kanpur (Uttar Pradesh), Nagpur (Maharashtra), Indore (Madhya Pradesh), Bhopal (Madhya Pradesh), Visakhapatnam (Andhra Pradesh), Patna (Bihar), Vadodara (Gujarat), Ludhiana (Punjab), Faridabad (Haryana), Rajkot (Gujarat), Dhanbad (Jharkhand), Amritsar (Punjab), Howrah (West Bengal), Ranchi (Jharkhand), Coimbatore (Tamil Nadu), Vijayawada (Andhra Pradesh), Jodhpur (Rajasthan), Madurai (Tamil Nadu), Raipur (Chhattisgarh).
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.