The central government is reportedly considering reducing the share of tax revenue allocated to states, a move that could have serious financial implications for Kerala. According to a Reuters report, the government plans to propose this reduction to the 16th Finance Commission, which is responsible for deciding how tax revenue is shared between the Centre and the states.
Currently, 41% of the Centre’s tax revenue goes to the states, but the plan is to bring it down to 40%. The timing of this proposal is crucial, as several states, including Kerala, have been demanding an increase in their tax share to 50% to cope with mounting financial challenges.
The 15th Finance Commission, led by N.K. Singh, had earlier reduced the share from 42% to 41%. The 16th Finance Commission is expected to submit its recommendations for the period 2026-27 to 2030-31 by October 31, 2025. If the central government gets approval from the Union Cabinet by March, it will formally present this proposal to the Finance Commission.
Even a 1% cut in tax devolution could mean an extra ₹35,000 crore in revenue for the central government. However, there has been no official response from the Centre regarding this move.
Kerala has already seen a sharp drop in its share of central taxes over the years. In 1980, states received only 20% of central taxes. This was increased over the decades, but despite reaching 41%, restrictions on fund usage have meant that the actual benefit to states has been limited.
The introduction of GST in 2017 further weakened states’ ability to raise their own revenue. Additionally, post-pandemic, the Centre increased cesses and surcharges, but this extra income was not shared with the states. If tax devolution is cut further, Kerala and other states could face even greater fiscal stress.
According to Union Budget documents, Kerala’s central tax share for 2024-25 is ₹24,772.38 crore, and for 2025-26, it is projected at ₹27,382.06 crore. However, this accounts for just 1.92% of the total amount allocated to all states. To put this in perspective, Kerala’s share was 3.88% during the 10th Finance Commission, but successive commissions have steadily reduced this, with the 15th Finance Commission marking a record low at 1.92%.
Kerala has also lost out on central grants for local self-governments. The state is widely recognised as a leader in decentralisation, yet its share of local government grants from the divisible pool fell from 4.54% under the 12th Finance Commission to 2.68% under the 15th Finance Commission.
Even the central Finance Commission acknowledged that Kerala’s tax share reduction was drastic, which is why a revenue deficit grant was sanctioned as temporary relief. However, by the time the second Pinarayi government came to power, this grant had largely disappeared.
While the proposed tax share reduction is making headlines now, Kerala’s struggle with declining central revenue is not new. According to the Kerala Budget speech, the decline in the state’s tax share has been happening for over 25 years.
The fiscal constraints Kerala faces today are not merely a result of recent central policies but are part of a long-term pattern of gradual reduction in financial support.
