The Hindu Editorial Analysis – July 9, 2025: What "A Fair Share" Means for Indian Federalism
Understanding the power of fiscal federalism is crucial for any serious aspirant preparing for UPSC CSE, SSC CGL, or banking exams. The recent editorial titled "A Fair Share: On Divisible Pool of Tax Collections" published in The Hindu (July 9, 2025), has thrown light on a vital component of Indian fiscal policy – the devolution of taxes between the Centre and the States. As India continues to steer its internal governance with a focus on cooperative federalism, this topic becomes more relevant than ever for competitive exam preparation.
With the 16th Finance Commission set to determine the next phase of revenue-sharing starting April 1, 2026, debates surrounding tax devolution, cess and surcharge misuse, and equity among States are gaining steam. This deep-dive analysis will not only help you grasp constitutional and economic nuances but also enrich your essay, GS Paper 2 and 3, and interview preparation.
Let's explore the key issues raised in the editorial and understand their implications for exams and governance.
The Background: What is the Divisible Pool of Taxes?
The divisible pool refers to the total taxes collected by the Central Government which are then distributed to the State Governments under the recommendations of the Finance Commission. According to Article 280 of the Constitution, the Commission is entrusted with deciding how taxes and grants will be shared.
Currently, 41% of the divisible pool is allocated to States. This figure was revised from 42% in 2015 (as per the 14th Finance Commission) and cut to 41% to adjust for the reorganization of Jammu & Kashmir in 2019.
Key Issue: Declining Share Due to Cesses and Surcharges
While the States are constitutionally entitled to a share of the divisible tax pool, the Centre has cleverly shifted a substantial portion of its revenue towards non-divisible sources like cesses and surcharges. These revenues are kept outside the divisible pool, which means States don't receive a share of them.
- Pre-Pandemic (2015-20): Cesses/surcharges were 12.8% of gross tax revenue.
- Post-Pandemic (2020-24): This increased to 18.5%.
As a result, the real effective share of State governments dropped from 35% to nearly 31% of the Centre's gross tax revenue.
Image credit: thehindu.com
The States' Demands: 50% of Divisible Pool
As per the editorial and statements from the Chairman of the 16th Finance Commission, 22 out of the 28 States have petitioned for an increase in their share from 41% to 50%. Interestingly, many of these States are governed by the ruling BJP itself, providing the issue a cross-party consensus.
Their arguments are two-fold:
- States bear a larger share of spending responsibilities, such as health, education, infrastructure, and welfare schemes.
- Post-GST, States have lost many avenues for independent tax collection, making them more dependent on the Centre for funds.
Horizontal (Inter-State) Devolution Concerns
The existing horizontal devolution formula is also under scrutiny. This formula uses variables like population, area, forest cover, and income distance. Southern States such as Karnataka and Tamil Nadu argue that their responsible fiscal management and strong economic performance are being penalized under this formula which heavily favors population size.
These States believe that the formula should reward good governance and fiscal discipline instead of disproportionately benefiting populous but less efficient States.
Need for Reform: What Should Be Done?
The editorial suggests multiple reformative steps that the Finance Commission (SFC) should consider:
- Modestly increase the share to States—say, from 41% to around 45%—as a middle path.
- Introduce a cap on the Centre's use of cesses and surcharges to ensure more tax proceeds enter the divisible pool.
- Revise the horizontal devolution formula to incorporate parameters like fiscal performance, governance, and per capita income.
- Include surplus cess collections into the divisible pool.
A new federal compact is essential to protect the fiscal autonomy of the States and promote a truly cooperative federal ethos.
Editorial Conclusion: Why 41% May No Longer Be Just
Retaining the status quo at 41% would undermine the principle of cooperative federalism often emphasized by the central government. It would also ignore the legitimate concerns shared by a majority of the States. With their burdens increasing and revenue avenues diminishing post-GST, States require a more equitable share in national revenue.
A Finance Commission that listens, adapts, and balances prudence with fairness can ensure India's federal structure remains strong, resilient, and inclusive.
Relevance for UPSC, SSC & Banking Exams
This topic is indispensable for aspirants of civil services and other government exams:
- UPSC GS Paper 2: Talks on fiscal federalism, Centre-State relations, and governance.
- UPSC GS Paper 3: Topics include budgeting, finance commissions, and taxation.
- Essay Paper: "Cooperative Federalism is the Soul of Indian Democracy" or "Fiscal Autonomy and Inclusive Development."
- Banking/SSC Exams: Useful for economics and polity sections in descriptive papers and interviews.
Quick Quiz for Practice
- What is the current share of States in the divisible pool of central taxes?
- A) 35%
- B) 41%
- C) 42%
- D) 50%
- Which body recommends the distribution of tax revenue between Centre and States?
- A) NITI Aayog
- B) Planning Commission
- C) Finance Commission
- D) RBI
- Why are cesses and surcharges problematic from the States' perspective?
- A) They increase inflation
- B) They are non-divisible
- C) They reduce exports
- D) They are not constitutional
- When will the 16th Finance Commission's recommendations come into effect?
- A) April 2025
- B) January 2026
- C) April 2026
- D) April 2027
- Which two parameters in horizontal devolution formula are criticized by progressive States?
- A) Fiscal deficit and area
- B) Forest cover and tax compliance
- C) Population and income distance
- D) GDP and inflation
Answer Key:
1) B, 2) C, 3) B, 4) C, 5) C
Final Thoughts
As India moves forward, debates over fiscal decentralization and revenue sharing will only intensify. By understanding editorials like this, competitive exam aspirants gain dynamic awareness—not just of economics or polity—but of the evolving nature of governance in India.
Keep following sarkarynaukary for the latest editorial summaries and exam-specific insights tailored to UPSC, SSC, and Banking aspirants.
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