The Union Budget 2026 incorporates the Finance Commission's recommendations on tax devolution, proposing to maintain states' share in the divisible pool of central taxes at 41% for the 2026–31 period. This follows the Commission's report submitted in November last year after extensive consultations with all 28 states and Union Territories. The 41% share for 2021–26 marked a reduction from 42% in the preceding five years, attributed to the reorganisation of Jammu and Kashmir into two Union Territories shifting revenues. Several states advocated for a higher devolution up to 50% to meet escalating expenditure on health, education, and infrastructure amid post-pandemic recovery and development needs. However, the effective share of overall tax collections has declined over time as increasing revenues come from cesses and surcharges not part of the divisible pool.

The Centre will provide Rs 1.40 lakh crore as Finance Commission grants to states for FY27 supporting local bodies and sectoral initiatives. The divisible pool comprises major central taxes like income tax, corporate tax, customs, excise duties, and GST compensation cess, excluding cesses surcharges. States pressed for broader inclusion and increased vertical devolution during consultations reflecting growing responsibilities. The decision reflects caution on widening vertical imbalances while addressing horizontal equity among states based on population, income distance, area, forest ecology, demographic performance, tax effort. In my view, prudent continuity ensuring predictability state finances amid central constraints revenue buoyancy challenges. Hoping enhanced grants dialogue address state demands fostering cooperative federalism balanced development diverse nation.

Vibe View: The vibe of retaining states' tax devolution at 41% in Budget 2026 is steady and cautious, like maintaining fiscal balance in turbulent times without bold shifts that could unsettle central or state finances. It's got that pragmatic continuity energy—following Finance Commission consultations vibe inclusive process listening 28 states UTs demands up to 50% but sticking 41% vibe realistic given cess surcharge growth outside pool reducing effective share. Overall vibe cooperative federalism—Rs 1.40 lakh crore grants FY27 vibe supportive local bodies sectoral needs compensating limited devolution increase. Jammu Kashmir reorganisation context vibe technical adjustment previous reduction. States rising expenditure health education infrastructure vibe valid pressure post-pandemic but central caution widening vertical imbalance vibe responsible avoiding inflation risks borrowing spikes. Broader vibe balanced equity—horizontal criteria population income forest ecology tax effort vibe fair diverse needs richer poorer greener states. Positive vibe predictability planning state budgets long-term projects. Hoping vibe encourages dialogue mechanisms including cesses pool enhancing true federal spirit mutual growth diverse nation.