How The Centre바카라�s Cess And Surcharges Policies Fuel the Fiscal Friction Between Northern and Southern States

The tax devolution scheme under the new Finance Commission, particularly, that the central government keeps revenues from cess and surcharges rather than share it with the states has once again become a point of contention. Leaders of South Indian states, argue they too should get a share of such levies, which amount to 15 per cent of India바카라�s gross tax. 

The Southern states argument centres around the difference between pool of tax revenue which is shared by the centre with the states and the funds raised by cess or surcharges. 

The Union Budget in its Annex바카라�4 statement details how net proceeds from Union taxes are distributed between the states. It also rules that cess and surcharge collections are earmarked for only nationally determined purposes. This could include infrastructure, defence, and funding of central schemes such as Beti Bachao or the Nirbhaya Relief Fund. However, this means that states, even those that contribute significantly to overall tax collections, do not get any share of the 15 per cent of the total tax collections that is raised by cess and surcharges. 

According to the Press Information Bureau (PIB) data, in January 2025, Uttar Pradesh, received approximately ₹ 31,962 crore from taxes, but Tamil Nadu바카라�s share was only ₹7,268 crore, Kerala바카라�s at ₹3,430 crore, Karnataka got ₹6,498 crore, Andhra Pradesh received roughly ₹7,211 crore, and Telangana바카라�s share was ₹3,745 crore. 

Data from parliamentary debates show that the five southern states contribute over 25 per cent of India바카라�s direct taxes and 28.5 per cent of its GST collections. From fiscal 2018-19 to 2022-23, Karnataka raised its GST and cess revenue by 55.92 per cent, Tamil Nadu바카라�s by 47.98 per cent, Andhra Pradesh바카라�s by 58.78 per cent, Kerala바카라�s by 67.42 per cent, and Telangana바카라�s by 42.36 per cent. The region바카라�s net direct tax collection has also grown by 2 per cent바카라� from 24.09 per cent in 2018-19 to 26.17 per cent in 2022-23.

Similarly, revenue collection data shows that between fiscal 2018바카라�19 and 2022바카라�23, Karnataka바카라�s contribution to GST and cess revenue increased by 56 per cent, while Tamil Nadu and Andhra Pradesh increased by 48 per cent and 59 per cent respectively. Kerala, too, saw a 67 per cent increase, and Telangana바카라�s contribution growth remained high at 42 per cent.

According to India Ratings바카라� chief economist Devendra Pant, 바카라�Because cesses and surcharges are not shared with the states, the overall pie is reduced, meaning that even if the nominal share remains unchanged, the actual funds received by states fall.바카라� This fiscal mechanism has further aggravated the sense of injustice felt by southern states, which are already contending with a reduced allocation based on demographic criteria.

GST, a destination-based tax implemented in July 2017, operates on a dual model wherein intra바카라�state transactions generate both CGST (collected by the Centre) and SGST (collected by the state) on a 50바카라�50 basis. The Centre keeps a huge portion of the central revenues comes from such cess and surcharges, leaving states feeling shortchanged. 

These discrepancies have constrained the fiscal autonomy of states that not only have to bear the cost of capital-heavy sectors. State governments hold the primary responsibility like health, education, and local infrastructure, and their budgets depend heavily on transfers from the Centre. As the proportion of central revenue locked away as cess rises, states have pointed out that they are underfunded to meet their local developmental needs.

RBI바카라�s 바카라�Handbook of Statistics on Indian States바카라� and detailed state-wise breakdowns provided in the Union Budget annexures, reveal that while overall tax devolution has risen over the decades바카라�from around 20% in 1980 to over 35% in 2025바카라�the simultaneous increase in cess has reduced the states바카라� tax revenue share. This has effectively curtailed states funds which they need to allocate to social infrastructure. 

In response to these concerns, Finance Minister Nirmala Sitaraman has pointed out all revenue sharing is according to the recommendations of the Finance Commissions바카라�which have periodically adjusted the states바카라� share in net tax proceeds. It has however been reported that Prime Minister Narendra Modi바카라�s cabinet is set to propsose a further reduction to states바카라� share of federal taxes from the promised 41% to around 40% starting in the fiscal year 2026바카라�27, a move that could further strain Centre바카라�state relations.

The debate over cess is part of a broader understanding of fiscal discipline and political accountability. As debates over cess and fiscal devolution continue to simmer, the coming recommendations from the upcoming Finance Commission바카라�expected to take into account both traditional measures and evolving economic indicators바카라�will be closely watched by both state governments and fiscal policy experts.