A United Voice Builds Against The Centre On Tax Devolution

The southern states of Kerala, Karnataka, Tamil Nadu, and Telangana along with Punjab have, in one voice, demanded and end to "penalising states for controlling population and performing well". A one-day conclave of Finance Ministers on the 16th Finance Commission held in Thiruvananthapuram has become an overt indication of a united move against the Union Government by the states, demanding equity in tax distribution. The Ministers from southern states and Punjab critiqued the Union Government in sharp terms at the Conclave.

“The most unkindest cut of all,” Krishna Byre Gowda, the Revenue Minister of Karnataka, quoted Shakespeare to explain the situation. “Karnataka was the worst hit by a cut in the tax devolution,” he said. There was a 23% cut by the 15th Finance Commission. As a solace, the Commission recommended a ₹11,495-crore special grant to Karnataka. “The Union Government stepped in with further travesty—the most unkindest cut—they refused to give this despite being recommended by the Finance Commission,” Gowda said.

The southern states and Punjab unanimously expressed concern that the financial distribution between the Union Government and the states is highly disproportionate and asymmetrical. States are entrusted with more responsibilities while the Union Government holds the major source of revenue. According to the 15th Finance Commission, the States account for 61per cent of the revenue expenditure but collect only 38% of the revenue receipts.

All the southern states face the challenge of "being penalised for effectively implementing population control". According to Gowda, Karnataka constitutes 5 percent of the population of the country, while the State’s contribution to the national GDP is 8.4 per cent. Karnataka’s GST contribution is 9.45 per cent of the all-India total, which is double the share of the population. According to Gowda, Karnataka contributes ₹4.5 lakh crore annually in all forms of taxes combined.

Deputy Chief Minister of Telangana Bhatti Vikramarka Mallu raised the demand that the tax devolution to the states should be raised to 50%. The increasing number of cesses and surcharges, which need not be shared with the states, effectively causes heavy losses to states by reducing their tax share. He criticised that the Union Government’s approach would weaken the federal structure of the country. He demanded that the powers of the Union Government be restricted. The looming threat of delimitation further adds to the woes of the southern states with the impending danger of losing political representation.

According to economist R Ramkumar, there is a vertical fiscal imbalance where expenditure responsibilities overwhelm the revenue-raising powers of the States. The vertical fiscal imbalance was further intensified by COVID-19, which resulted in widening the gap between fiscal responsibilities and the devolution of taxes.

Tamil Nadu has also demanded that the limit of tax devolution be raised to 50 per cent. Thangam Thennarasu, Tamil Nadu’s Finance Minister, said that Tamil Nadu's share of the devolved taxes was reduced from 7.931 per cent in the Seventh Finance Commission to a mere 4 per cent in the 15th Finance Commission. “This continuous reduction caused a heavy loss of ₹3.5 lakh crore, which is equal to 43 per cent of the state’s outstanding debt. This has put a crumbling burden on the state,” said the Minister.

With every Finance Commission, the component of cess and surcharges has increased, reducing the share of taxes devolved to states. During the 14th Finance Commission, cess and surcharges constituted 12.86 per cent of the total revenue of the Union Government. This increased to 17 per cent during the 15th Finance Commission. “Due to this reduction in the divisible pool, Kerala lost about ₹7,568 crore during the 14th Finance Commission and about ₹14,215 crore during the 15th Finance Commission, totalling ₹21,783 crore during the last two Finance Commissions. This is equivalent to 26 months of Social Security benefits, imposing a heavy burden on the State,” said Gopakumar Mukundan, Fellow at CSES (Centre for Socio-Economic and Environmental Studies), a research organisation in Kochi.

The states demand that the 16th Finance Commission correct the errors and take steps to increase the tax devolution to states to 49-50%. All the southern states collectively share the concern that a share less than this would further worsen the fiscal situation of the states. “We demand equity, though not equality; some States get ₹300 for every ₹100 they pay, and we are fine with that. We agree with the idea of uplifting weaker States. But our only demand is that we deserve more than what we get. Now Karnataka gets only ₹12 to ₹15 for every ₹100 paid to the Union Government. We deserve to get at least ₹25 back from every ₹100 we pay,” said Gowda, the Karnataka Revenue Minister.