The Centre’s share in States’ revenue has surged in the last decade

The falling efficiency of States in collecting more taxes has deepened their dependency on the Centre

Over the last decade, States have been relying more and more on transfers and grants from the Centre.

In the last decade (FY16 to FY25), 23-30% of the total revenue of States was collected from the Centre as transfers. However, in the 2000s and the first half of 2010, the share was 20-24%. Also, close to 65-70% of the non-tax revenue of States was collected from the Centre as grants in the last decade compared to the 2000s and the first half of the 2010s when the share was lower at 55-65%.

States have also not done enough to efficiently collect taxes to increase their own tax revenue. In addition, revenue from non-tax revenue, other than Central grants, has been diminishing.

The combination of these factors has meant that the dependency of States on Central funds has risen in recent years.

Chart 1 shows the share of States’ own tax revenue, non-tax revenue, and Central transfers in their total revenue. For over a decade now, States’ own tax revenue as a share of their total revenue has remained considerably below the 50% mark, while in the 2000s and in the early 2010s, it had crossed the 50% mark for many years or remained close to it. Own tax revenue of States includes money raised through stamp duty, registration fees, motor vehicle tax, and other taxes, along with the State component in Goods and Services Tax (GST), or State GST (SGST).

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Moreover, the share of non-tax revenue in States’ total revenue is likely to go below the 24% mark in FY25 for the first time in the past 25 years. Non-tax revenue of States includes grants from the Centre, earnings from social, fiscal, economic, and general services rendered by the States, interest receipts, and dividends/profits from State public sector enterprises.