Syllabus: Issues and challenges pertaining to the federal structure
Tax Contribution vs. Devolution Pattern
- Seven States contribute more to total tax collections than their share in tax devolutions from the Centre.
- Maharashtra shows the largest negative gap: contributes 36.1% of India’s taxes but receives only 6.65% of devolved taxes (2020-21 to 2024-25).
- Other States with lower devolution than contribution include Karnataka (–8.8 pps), Haryana (–4.3 pps), Gujarat (–3.5 pps), Tamil Nadu (–2.95 pps), Telangana (–1.4 pps) and Goa (–0.04 pps).
States Receiving Higher Devolution Share
- Uttar Pradesh contributed 4.6% of total taxes but received 15.8% of devolved taxes — the highest positive gap.
- Bihar (+8 pps), Madhya Pradesh (+5.5 pps) and Rajasthan (+3.55 pps) also receive significantly higher devolution shares relative to their tax contribution.
Fiscal Federalism Context
- These differences arise due to Finance Commission formulas prioritising equity, income distance, population, area, and fiscal needs.
- High-income, high-tax States subsidise fiscally weaker States, reflecting India’s redistributive federal structure.