**Executive Summary**
This document contains the response of the Minister of State in the Ministry of Finance to questions raised in Lok Sabha regarding the increasing dependency of States on Central grants. The response outlines measures taken to enhance States' tax revenue, address declining tax revenue to GSDP ratios, and describes tax reforms under consideration. The document answers questions raised on December 15th, 2025.
**Key Points / Main Content**
* **Central Grants to States:**
* The Union Government provides resources to States through Tax Devolution, Grants-in-Aid (including Finance Commission Grants), and grants for Centrally Sponsored Schemes (CSS).
* There has been a substantial increase in devolution of central taxes and duties from the center to the States, as well as transfers under CSS, in the last decade.
* Financial assistance of ₹4,24,226.50 crore has been provided to States since 2020-21 under the Scheme of Special Assistance to States for Capital Expenditure/Investment.
* **Enhancing States' Tax Revenue:**
* States need to improve the tax base, prevent revenue leakages, and improve tax compliance to reverse the declining ratio of own tax revenue to GSDP.
* The Union Government has provided funds for digitization and information technology infrastructure to aid in this effort.
* Tied grants recommended by the Finance Commission are linked to efforts of urban local bodies to increase tax collection.
* **Fiscal Responsibility and Budget Management (FRBM) Act:**
* States have enacted FRBM Acts to ensure fiscal prudence and stability.
* Compliance to the FRBM Act is monitored by the State Legislature.
* The Department of Expenditure, Ministry of Finance generally follows the fiscal limits mandated by the accepted recommendations of the Finance Commission while exercising the powers to approve borrowings by States.
* **GST Reforms:**
* A Group of Ministers (GoM) has been constituted by the GST Council to simplify the GST rate structure, reduce classification-related disputes, enhance GST revenue, and recommend changes to GST rates.
* Grievances regarding rate rationalization are examined by the GoM.
* The Law Committee (GST Act, rules) and the Fitment Committee (GST rates, classification) address grievances from States.
* System-related grievances are examined by GSTN, and specific complaints are examined by the GST Council Secretariat for resolution.
**Impact Analysis**
**Stakeholder: State Governments**
* **Impact:** The document addresses issues concerning the financial health and autonomy of State Governments, outlining the support provided by the Union Government, as well as expectations for fiscal responsibility and tax revenue improvement.
* **Action Required:** States need to implement measures to improve their tax base, prevent revenue leakages, improve tax compliance, and adhere to FRBM Act provisions.
**Stakeholder: Union Government (Ministry of Finance, GST Council)**
* **Impact:** The document reflects the actions and strategies of the Union Government in supporting States financially and addressing their concerns through GST reforms.
* **Action Required:** Continue to provide financial assistance, monitor States' compliance with fiscal regulations, and address GST-related grievances expeditiously.
**Stakeholder: Citizens of India**
* **Impact:** Improved fiscal health of state governments and streamlined GST structure will contribute to improved public services and economic conditions.
* **Action Required:** No direct action is required by citizens based on this document.
Key Entities Referenced
Finance Commission: An Indian constitutional body responsible for recommendations on financial relations between the Union and the States.
Centrally Sponsored Schemes (CSS): Schemes implemented by state governments but funded largely by the central government.
Scheme of Special Assistance to States for Capital Expenditure/Investment: A Government scheme to provide financial assistance to states to invest in capital projects.
Fiscal Responsibility and Budget Management (FRBM) Act: An Act enacted by state governments to ensure fiscal prudence and stability.
GST Council: A council responsible for making recommendations related to Goods and Services Tax (GST) rate.
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF EXPENDITURE
LOK SABHA
UNSTARRED QUESTION NO. 2442
TO BE ANSWERED ON MONDAY, 15th DECEMBER, 2025
AGRAHAYANA 24, 1947 (SAKA)
INCREASING DEPENDENCY OF STATES ON CENTRAL GRANTS
2442. Ms. S Jothimani
Will the Minister of Finance be pleased to state:
(a) the reasons for the increasing dependency of States on Central transfers and grants, which
have accounted for nearly 23-30 per cent of States’ total revenue during the last decade;
(b) the measures taken/being taken by the Government to enhance the capacity of States to
mobilise own tax revenue, including improving efficiency in collection of stamp duty,
registration fees, motor vehicle tax, State excise duties, and other revenue sources;
(c) whether the Government has assessed the declining ratio of States own tax revenue to Gross
State Domestic Product (GSDP) in several States such as Tamil Nadu, Kerala and Madhya
Pradesh and if so, the details of the factors contributing to this decline;
(d) the steps taken/being taken by the Government to reverse the said trend and improve long-
term revenue sustainability of the States; and
(e) whether the Government is considering any tax reforms, including adjustments in tax-sharing,
GST structure, that enable States to retain a higher share of taxes collected by them and if so,
the details thereof?
ANSWER
MINISTER OF STATE IN THE MINISTRY OF FINANCE
(SHRI PANKAJ CHAUDHARY)
(a) to (b) The Union Government provides resources to States under Tax Devolution from divisible
pool of Central taxes and duties and Grants-in-Aid including Finance Commission Grants and
grants for Centrally Sponsored Schemes (CSS). In the last decade, there has been a substantial
increase in devolution of central taxes & duties from the center to the States, transfers to States
under CSS. In addition, States have been provided financial assistance of Rs. 4,24,226.50 croresince 2020-21 under the Scheme of Special Assistance to States for Capital
Expenditure/Investment. Capital expenditure in the economy has a higher multiplication factor and
crowds-in private investment. This raises supply side capacity and enhances economic growth
leading in enhancement in the capacity of States to mobilise own tax revenue.
(c) to (d) To reverse the declining ratio of own tax revenue to GSDP, States need to improve the
tax base, prevent leakages of revenue and improve tax compliance. For this, the power of
digitization and information technology should also be leveraged. The Union Government has
provided fund to States under the Scheme of Special Assistance to States for Capital
Expenditure/Investment for digitization and information technology infrastructure. In addition, a
part of the tied grants recommended by the Finance Commission is also linked to efforts of the
urban local body to increase the tax collection.
Moreover, States have enacted their Fiscal Responsibility and Budget Management (FRBM) Act.
which makes the State Government responsible to ensure prudence in fiscal management and fiscal
stability by progressive elimination of revenue deficit, reduction in fiscal deficit, prudent debt
management consistent with fiscal sustainability, greater transparency in fiscal operations of the
government. Compliance to the Fiscal Responsibility and Budget Management (FRBM) Act is
monitored by the State Legislature. Department of Expenditure, Ministry of Finance generally
follows the fiscal limits mandated by the accepted recommendations of the Finance Commission
while exercising the powers to approve borrowings by States under Article 293 (3) of the
Constitution of India.
(e) A Group of Ministers (GoM) on rate rationalization has been constituted by GST Council to
simplify the GST rate structure, reduce classification related disputes, enhance GST revenue and
recommend changes to GST rates. Grievances in respect of rate rationalization including those
from states are examined by the GoM. Further, the grievances received from states are examined
by the Law Committee (in respect of GST Act, rules etc.) and by Fitment Committee (in respect
of GST rates, classification etc.) Both the committees are comprised of officers both from the
Centre as well as the States. System related grievances from States are examined by GSTN for
resolution. In addition, any specific complaints/grievances from States are examined by the GST
Council Secretariat, as and when received, for expeditious resolution.
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