Gujarat wants hike in states' share of divisible pool of taxes: 16th Finance Commission chief

The Gujarat government has demanded that the share of states in the 'divisible pool of taxes' be raised from the current 41 per cent to 50 per cent, 16th Finance Commission chairperson Arvind Panagariya said on Monday.

A divisible pool is the portion of gross tax revenue which is distributed between the Centre and the states. At present, 41 per cent of gross tax revenue goes to the states as per the recommendation of the 15th Finance Commission.

The 16th commission, which is visiting Gujarat, held meetings with chief minister Bhupendra Patel and senior officials during the day.

Addressing the media in Gandhinagar, Panagariya said, "CM Patel has sought a hike in the states' share in Central taxes from 41 per cent to 50 per cent. Prior to Gujarat, some other states had also demanded the same. In its memorandum, the Gujarat government said the hike is justified because states are bearing expenses of some key sectors like education and health."

The task of the 16th Finance Commission is to make recommendations regarding the division of tax revenues between the Centre and states (vertical devolution) and also on how the resources should be divided among the 28 states (horizontal devolution), he informed.

The 16th FC also makes recommendations about urban and rural body grants, sectoral and state level grants, as well as disaster relief.

During the meeting, the Gujarat government proposed that urbanisation should also be considered as one of the criteria while allocating resources to states because a state like Gujarat, which is witnessing rapid urbanisation, will need "considerable resources to provide quality services and sustainable infrastructure to its citizens".

"The Gujarat government also recommended that states should be given sector-specific grants. Some of these sectors include renewable energy, tourism and disaster relief. Moreover, the state also proposed special provision for sectors like nutrition and for local bodies," Panagariya said.

The Gujarat government has proposed that a multidimensional poverty index or MPI should be considered as a criteria while deciding allocation among states, which would help in bringing equality and creating a comprehensive system to fight poverty, he said.

"It also proposed that a state's contribution to the nation's GDP should be considered while distributing tax income among states. The (Gujarat) government said states having higher share in GDP face various challenges due to industrialisation and urbanisation. Adding this criteria would ensure more funds for these states to meet those challenges," said Panagariya.

A release from the Bhupendra Patel government said it had made a recommendation that states like Gujarat, which have maintained fiscal prudence in a disciplined manner over several years, should get a "reward" from the commission, so that other states can take inspiration and follow suit.

The 16th Finance Commission headed by Panagariya is expected to finalise its report on recommendations by October 2025. The report will cover an award period of five years commencing from 1 April 2026, the release said.

The panel, comprising four members and a chairperson, has visited nine states, including Gujarat, so far, and the exercise will continue until May next year, Panagariya said.

He told reporters the panel will be in Gujarat on Tuesday as well and will meet representatives from political parties, business leaders, and elected representatives of district and taluka panchayats and civic bodies.