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Tax Contribution vs Tax Devolution among States

09 Dec 2025 GS 3 Economy
Tax Contribution vs Tax Devolution among States Click to view full image

Context

  • Seven States contribute a higher share of total tax collections than the share of tax devolution they receive from the Centre (negative difference).

  • Conversely, some States receive a higher share of devolution than their tax contribution (positive difference).

Data Period

  • Analysis based on 2020-21 to 2024-25.

Contributions

States with positive difference (receive more than they contribute):

  • Uttar Pradesh:

    • Contribution to total tax: 4.6%

    • Share in devolution: 15.8%

    • Highest positive difference.

  • Bihar: +8 pps

  • Madhya Pradesh: +5.5 pps

  • Rajasthan: +3.55 pps

States with negative difference (contribute more than they receive):

  • Maharashtra:

    • Contribution: 36.1% of total tax revenue

    • Devolution share: 6.65%

    • Largest negative difference.

  • Other states with negative differences:

    • Karnataka: –8.8 pps

    • Haryana: –4.3 pps

    • Gujarat: –3.5 pps

    • Tamil Nadu: –2.95 pps

    • Telangana: –1.4 pps

    • Goa: –0.04 pps

Overall Pattern

  • High-income, industrialised States contribute more tax revenue relative to what they get back.

  • Economically weaker or demographically large States receive higher devolutions relative to their tax contributions—reflecting the redistributive nature of Finance Commission transfers.

Prelims Practice MCQs

Q. Consider the following statements regarding tax contribution and devolution among States (2020-21 to 2024-25):

  1. Maharashtra received a higher share of tax devolution than its share in total taxes collected.

  2. Uttar Pradesh’s share in total taxes collected exceeded its share in tax devolutions.

  3. Bihar received a larger share in devolution than its contribution to total taxes.

Which of the statements given above is/are correct?
A. 1 and 2 only
B. 2 only
C. 3 only
D. 2 and 3 only

Answer: C

Explanation:

  • Statement 1 is incorrect: Maharashtra’s contribution (36.1%) far exceeds its devolution share (6.65%).

  • Statement 2 is incorrect: U.P. contributes 4.6% but receives 15.8%—its devolution share is higher.

  • Statement 3 is correct: Bihar has a positive difference (+8 pps).

Q. With reference to the States contributing more to total taxes than what they receive back as devolution, consider the following:

  1. Karnataka

  2. Gujarat

  3. Rajasthan

  4. Tamil Nadu

  5. Telangana

Which of the above belong to this category?
A. 1, 2 and 3 only
B. 1, 2, 4 and 5 only
C. 3, 4 and 5 only
D. 1, 2, 3, 4 and 5

Answer: B

Explanation:

  • Karnataka (negative difference)

  • Gujarat (negative)

  • Tamil Nadu (negative)

  • Telangana (negative)

  • Rajasthan receives more than it contributes → excluded.

Q. Consider the following statements:

  1. Maharashtra has the highest negative difference between its tax contribution and its share in devolutions.

  2. Kerala is one of the seven States whose tax contribution exceeds its share in devolutions.

  3. Haryana and Goa both exhibit negative differences.

Which of the statements given above is/are correct?
A. 1 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2 and 3

Answer: B

Explanation:

  • Statement 1: Correct. Maharashtra has the largest negative difference.

  • Statement 2: Incorrect. Kerala is not mentioned among the seven.

  • Statement 3: Correct. Haryana (–4.3 pps) and Goa (–0.04 pps) have negative differences.



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