Divisible pool

Also called: Shareable pool · Topic: Fiscal Federalism: Finance Commission, Devolution and Centre-State Finances · NCERT: Beyond NCERT

Meaning

The divisible pool (also called the shareable pool) is the part of the Centre's gross tax revenue that the Constitution lets the Centre share with the states. It is what is left after taking out cesses, surcharges, the cost of collection, and the taxes of Union Territories.

Divisible pool = Gross tax revenue − cesses − surcharges − cost of collection (and Union Territory taxes)

It matters because the Finance Commission decides what share of this pool goes to the states. The states then receive that share as untied money, meaning they can spend it as they choose. Anything the Centre keeps outside the pool is not shared with the states at all.

Explanation

How the pool is built

• Gross tax revenue (GTR): all the taxes the Centre collects, before it passes anything to the states.
• The Constitution tells us what to remove from GTR:
• Surcharge: an extra tax charged on top of an existing tax. An example is an extra percentage on the income tax of very high earners. Under Art. 271 surcharges go only to the Union.
• Cess: a tax raised for a named purpose, such as the Health and Education Cess or the Road and Infrastructure Cess. Art. 270 leaves out "any cess levied for specific purposes".
• Cost of collection: what the tax departments spend to collect the tax.

• Taxes of Union Territories.

• What remains is the divisible pool. The 16th FC restates this definition: the pool is what remains after excluding cost of collection, cesses and surcharges from gross tax revenue [1].

• Art. 270 also does not share taxes under Arts. 268, 269 and 269A:
• Art. 268 and Art. 269 taxes already go to the states.
• Art. 269A covers IGST, which is split between the Union and the states in its own way.

Vertical and horizontal devolution

• Vertical devolution: the share of the divisible pool that goes to all the states together. This is the headline "41%".
• Horizontal devolution: how that 41% is divided among the individual states. The Finance Commission uses a formula with weights for this, such as income distance, population and area.

Worked example (made-up numbers)

• Gross tax revenue = ₹100 lakh crore.
• Cesses + surcharges = ₹15 lakh crore. Cost of collection = ₹1 lakh crore.
• Divisible pool = 100 − 15 − 1 = ₹84 lakh crore.
• States' share = 41% × 84 = ₹34.4 lakh crore.
• As a share of gross tax revenue, this is 34.4 ÷ 100 = 34.4%, not 41%.
• If cesses and surcharges rise to ₹20 lakh crore:
• The pool shrinks to ₹79 lakh crore.
• The states get ₹32.4 lakh crore.
• That is only 32.4% of GTR, even though the headline share is still 41%.

What makes the pool grow or shrink

• The pool grows when:

• basic tax rates or the tax base grow, as with income tax, corporation tax and CGST.

• The pool shrinks relative to GTR when:

• The Centre shifts to cesses and surcharges:

  • The Centre raises money through cesses and surcharges instead of basic tax rates.
  • That money stays outside the pool.
  • So the states get a smaller slice of what the Centre actually collects.

• Trend: cesses and surcharges made up 2.3% of the Centre's GTR in 1980-81. This rose to 15% in 2019-20 [3]. The share stayed above 15% between 2020-21 and 2022-23 [7].

In India

• Legal basis:
• Art. 270 says all Union taxes are shared with the states, except those listed above.

• Art. 280 sets up the Finance Commission every five years to recommend the states' share.

• How the pool widened over time:

• Before 2000:
  • Only income tax had to be shared.
  • Union excise could be shared if Parliament chose (old Art. 272).
  • States got nothing from the growth in customs or corporation tax.
• 80th Amendment (2000):
  • It was based on the 10th FC's "alternative scheme".
  • States now get a share of all central taxes, so Art. 272 was deleted.

• 101st Amendment (2016): it added CGST and the Union's portion of IGST to the shareable taxes.

• The states' share of the pool over time:

• 13th FC: 32%.
• 14th FC: 42% for 2015-20 [5].
• 15th FC: 41% for 2021-26. The 1% cut reflects Jammu and Kashmir becoming Union Territories [4].

• 16th FC (Chair: Dr. Arvind Panagariya):

  • It submitted its report on 17 November 2025, and the report was tabled in Parliament on 1 February 2026.
  • It kept the share at 41% for 2026-27 to 2030-31 [1][2].

• 16th FC weights for horizontal devolution (2026-31) [1]:

• Income distance: 42.5%.
• Population (2011 Census): 17.5%.
• Demographic performance: 10%. This now measures population growth from 1971 to 2011.
• Area: 10%.
• Forest: 10%.

• Contribution to GDP: 10%. This criterion is new.

• Effective share vs the headline share:

• 2019-20:
  • The Centre collected ₹3,69,111 crore through cesses and surcharges.
  • So only about 85% of GTR could form the divisible pool [3].
  • The 14th FC's 42% was effectively only 35.7% of the Centre's tax receipts. This figure leaves out GST items [3].

• 2020-21: the states got about 29% of GTR, against the 41% headline [6].

• GST compensation cess:

• It started in 2017 and was charged on luxury and "sin" goods.
• It paid states for the revenue they lost when GST began.
• It also sat outside the divisible pool.

Don't confuse with

• Gross tax revenue: GTR is everything the Centre collects. The divisible pool is GTR minus cesses, surcharges, cost of collection and UT taxes. The 41% applies to the pool, not to GTR.
• Grants-in-aid (Art. 275): these are separate transfers on top of the tax share, and they are often tied to a purpose. The 16th FC recommended ₹9.47 lakh crore in grants for 2026-31 [1]. Grants are not part of the divisible pool.
• Art. 269 taxes: these are levied and collected by the Union but assigned wholly to the states, such as taxes on inter-state sale and on consignment of goods. They are not shared through the pool.
• Vertical vs horizontal devolution: vertical is how much of the pool goes to all the states together (41%). Horizontal is how that amount is divided among the states (income distance, population and so on).

Prelims Hooks

• Divisible pool = GTR − cesses − surcharges − cost of collection, and Union Territory taxes are also left out.
• Art. 271: surcharges go exclusively to the Union. Cesses "for specific purposes" are also outside Art. 270 sharing. So the Centre has no constitutional duty to share them [3].
• The 80th Amendment (2000) brought in the 10th FC's alternative scheme, so states share all central taxes. It deleted Art. 272.
• The 101st Amendment (2016) added CGST and the Union's portion of IGST to the shareable taxes.
• The 16th FC (Arvind Panagariya, 2026-31) kept the states' share of the divisible pool at 41%, the same as the 15th FC [1].
• Trap: the 41% is a share of the divisible pool, not of gross tax revenue. The actual share of GTR was about 29% in 2020-21 [6].

Mains Points

• Headline vs effective devolution (GS-II, cooperative federalism):
• Cesses and surcharges took up over 15% of GTR in 2020-23 [7].
• So the states' real share falls well below 41%.
• If cesses and surcharges had been in the pool in 2019-20, the states would have received about 5% more revenue [3].

• What the states ask for: cap cesses and surcharges at a fixed share of GTR, or bring them into the pool. Removing the exclusion would need an amendment to Art. 270/271.

• The trade-off for the Centre (GS-III):

• Cesses give the Centre earmarked, flexible money for defence, roads and health.
• But they make the tax system more complex and cut the states' untied funds.

• States deliver most public services, such as police, health and schooling, so less untied money for them hurts service delivery.

• The goal of the 80th Amendment, partly undone:

• Sharing all taxes was meant to stop the Centre favouring taxes it did not have to share.
• It also let states benefit from the growth of the whole tax base.
• The later rise of cesses has brought back the same bias. After GST, states gave up much of their power to set their own taxes, so they now depend even more on the size of the divisible pool.

Read more

• Constitutional architecture of taxing and sharing: the divisible pool