India’s federal compact is once again under strain, and this time the pressure is coming not from political confrontation but from deeper fiscal tensions. Several economically advanced states are increasingly dissatisfied with their share of central transfers, arguing that the current system penalises performance. This raises a fundamental question: can a new fiscal arrangement provide a more balanced and equitable solution?To answer this, we must revisit one of the longstanding features of India’s fiscal system, the exclusive authority of the Union government to levy personal income tax. In light of growing demands from richer states for greater fiscal play, it may be time to consider whether states, too, should be given limited powers to impose an income tax on individuals.
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