As the 16th Finance Commission deliberates on the tax devolution between the central government and states, five non-BJP ruled states—Kerala, Karnataka, Tamil Nadu, Punjab, and Telangana—are calling for an increased share of 50% from central tax revenues. Citing the rising burden of surcharges, these states argue that their contributions to the national exchequer are not matched by the share they receive in return. They stress that the current allocation is insufficient, especially given their efforts to improve public welfare. The call for equitable distribution has intensified as states look to balance their fiscal autonomy with the Centre’s policies.
The Demand for 50% Tax Devolution
Kerala Chief Minister Pinarayi Vijayan, speaking at the conclave of finance ministers, emphasized the critical need for states to receive a 50% share of tax devolution from the central pool. His demand is based on the surging trend of cesses and surcharges imposed by the central government, which are not shared with states. According to Vijayan, these surcharges have restricted states’ financial resources, affecting their capacity to undertake welfare measures. States like Kerala, with their notable achievements in healthcare, education, and social development, have felt the strain more acutely. As per Vijayan, the central government must acknowledge this imbalance and increase the share to 50%, as recommended by several state governments during past discussions.
The previous 15th Finance Commission had allocated only 41% of central tax revenues to states, down from 42% in the 14th Finance Commission’s recommendation. This reduction in tax devolution has further widened the fiscal gap between the Centre and states, prompting this renewed demand for fairness. Kerala, Tamil Nadu, Karnataka, and Telangana argue that their financial contributions far exceed the returns they receive, especially given the rising costs of public welfare programs and infrastructure development.
Surcharges and Cesses: A Growing Concern
Surcharges and cesses imposed by the central government have grown substantially over the last decade, now constituting nearly 20% of the total gross tax revenue. Kerala’s CM Vijayan has highlighted that these surcharges are not part of the divisible tax pool shared with the states. This practice effectively reduces the share of resources available for state-level welfare programs, pushing states to rely on limited fiscal autonomy. The exclusion of these surcharges from the divisible tax pool has become a focal point of contention, with southern states particularly vocal about its impact on their financial autonomy.
Finance ministers from Karnataka and Telangana also raised concerns about this increasing reliance on surcharges. Telangana’s finance minister pointed out that the Centre’s reliance on cesses and surcharges now accounts for over 28% of its gross tax revenue, which significantly limits the financial resources available to states. This trend has worsened the fiscal imbalance between the Centre and states, further fueling the demand for an increase in tax devolution.
Fiscal Imbalance Between Centre and States
The vertical fiscal imbalance between the Centre and states has been a long-standing issue. States like Kerala and Karnataka have repeatedly called for a recalibration of taxing powers and expenditure obligations to rectify this imbalance. The increasing reliance on surcharges and cesses has disproportionately impacted states with better governance, especially those that have made significant investments in public health, education, and infrastructure. Kerala, for instance, has seen its share in central taxes fall from 3.05% in the 11th Finance Commission to 1.92% in the 15th Finance Commission.
This decline in the share of central taxes allocated to states with higher per capita incomes has led to concerns about fiscal equity. The weightage given to population criteria in the Finance Commission’s recommendations has meant that states with lower populations and higher development indicators receive a smaller share of central taxes. This has sparked debates on the need for a more equitable distribution of resources, especially for states that have made significant strides in public welfare and social development.
The Call for Equity in Tax Distribution
States like Kerala, Karnataka, and Tamil Nadu have called for a more equitable distribution of central taxes, arguing that the current formula disproportionately affects states with smaller populations and higher development indicators. These states contribute significantly to the national exchequer through taxes and job creation but receive a smaller share in return. The equity principle has been a point of contention for years, with southern states arguing that they are being penalized for their achievements in governance and public welfare.
Karnataka’s revenue minister, Krishna Byre Gowda, has stated that the demand for a 50% share in tax devolution is not just a financial issue but a matter of justice. Southern states like Karnataka and Kerala, which have consistently contributed to the national economy through job creation, innovation, and infrastructure development, feel that they are not receiving their fair share of central taxes. This inequity has led to growing discontent among these states, which are now demanding a more balanced approach to tax devolution.
The Impact of GST on State Finances
The introduction of the Goods and Services Tax (GST) in 2017 was hailed as a landmark reform, but it has had significant implications for state finances. While GST has simplified the tax structure and brought more transparency, it has also limited the fiscal autonomy of states. Before GST, states had the power to levy certain taxes, but with its introduction, these powers have been curtailed. States now rely more on the central government for their share of GST revenues, which has further widened the fiscal imbalance.
Punjab’s finance minister, Harpal Singh Cheema, has pointed out that while GST has streamlined tax collection, it has also restricted states’ ability to raise revenue independently. The centralization of tax collection has led to delays in the distribution of GST revenues to states, affecting their ability to plan and implement welfare programs. The GST compensation mechanism, which was introduced to ensure that states do not lose revenue after the implementation of GST, has also been a point of contention. Many states have complained about delays in receiving compensation, which has further strained their finances.
Future of Tax Devolution: What Lies Ahead?
The 16th Finance Commission is expected to submit its report by early 2025, and its recommendations will shape the future of tax devolution between the Centre and states. As the commission conducts its consultations with various states, the demand for a 50% share in tax devolution is likely to be a major point of discussion. States like Kerala, Karnataka, Tamil Nadu, Punjab, and Telangana are expected to push for a more equitable distribution of resources, especially in light of the growing reliance on surcharges and cesses.
The central government, however, is likely to face challenges in accommodating these demands. With its own fiscal pressures, including rising public debt and the need to finance national infrastructure projects, the Centre may be reluctant to increase the share of tax devolution to 50%. However, states argue that without a more equitable distribution of resources, they will struggle to meet the growing demands of their populations, especially in areas like healthcare, education, and infrastructure.
Conclusion
The ongoing discussions around the 16th Finance Commission have brought to the forefront the long-standing issue of fiscal imbalance between the Centre and states. Southern states like Kerala, Karnataka, and Tamil Nadu, which have consistently contributed to the national economy, are demanding a larger share of central taxes to ensure that they can continue to invest in public welfare and infrastructure. The rising trend of surcharges and cesses has only exacerbated this imbalance, prompting these states to call for a more equitable distribution of resources. As the Finance Commission prepares its recommendations, the demand for a 50% share in tax devolution is likely to be a key issue that will shape the future of Centre-state relations in India.
FAQ Section
What is the significance of the 50% tax devolution demand by states?
States like Kerala, Tamil Nadu, and Karnataka are advocating for 50% tax devolution from the Centre to ensure they receive adequate resources to support state welfare programs and public infrastructure. They argue that the current 41% allocation is insufficient to meet their needs, especially given the rising financial burden imposed by cesses and surcharges that are not shared with them. This demand underscores the fiscal imbalance between the Centre and states, where states are contributing significantly to the national economy but are not receiving a proportionate share of tax revenues.
How do surcharges and cesses affect state revenues?
Surcharges and cesses are additional taxes levied by the central government that are not shared with states, unlike regular taxes that are part of the divisible tax pool. Over the past decade, the share of surcharges and cesses has grown substantially, now making up around 20% of the Centre’s gross tax revenue. This practice has effectively reduced the funds available to states, forcing them to rely on limited financial resources. States are concerned that these additional taxes limit their ability to finance crucial public welfare programs and have called for the inclusion of surcharges and cesses in the divisible pool.
Why is there a fiscal imbalance between the Centre and states?
The fiscal imbalance between the Centre and states arises from the unequal distribution of taxing powers and financial obligations. While states are responsible for spending on key sectors like health, education, and infrastructure, they have limited taxation powers, relying heavily on the Centre for funds. Additionally, the central government’s growing reliance on surcharges and cesses, which are not shared with states, has worsened this imbalance. Southern states with higher per capita incomes and better public services feel particularly disadvantaged under the current tax-sharing arrangements.
What are the key arguments for equitable tax distribution?
The argument for equitable tax distribution centers around the idea that states should receive a fair share of central taxes based on their contributions to the national economy and the needs of their populations. Southern states, in particular, have argued that their high levels of development and per capita income should not penalize them in the allocation of central tax revenues. They contend that the current population-weighted formula for tax devolution does not account for their significant investments in public welfare, which requires adequate financial support from the Centre.
How does GST impact state finances and fiscal autonomy?
The introduction of the Goods and Services Tax (GST) in 2017 was meant to streamline tax collection across the country, but it has also reduced states’ fiscal autonomy. Before GST, states had more power to levy certain taxes, which allowed them greater financial flexibility. Under the GST regime, states are now more dependent on the Centre for their share of tax revenues, which has further exacerbated the fiscal imbalance. Many states have also complained about delays in receiving GST compensation, which has impacted their ability to plan and execute public welfare programs.
Why are southern states particularly vocal about tax devolution?
Southern states like Kerala, Tamil Nadu, and Karnataka have been vocal about tax devolution because they feel that the current distribution of central taxes does not reflect their contributions to the national economy. These states have high levels of social development and infrastructure, which require significant financial resources to maintain. However, under the current formula, which gives weightage to population, they receive a smaller share of central taxes compared to states with larger populations but lower development indicators. This perceived inequity has led southern states to push for a more balanced approach to tax devolution.
What is the future of tax devolution under the 16th Finance Commission?
The 16th Finance Commission is expected to submit its report by early 2025, and its recommendations will play a crucial role in shaping the future of tax devolution in India. As consultations with various states continue, the demand for a 50% share in tax devolution is likely to be a major point of discussion. While states are pushing for a larger share of central taxes, the central government faces its own fiscal pressures and may be reluctant to increase the devolution percentage. However, without a more equitable distribution of resources, states argue that they will struggle to meet the growing demands of their populations.
How are surcharges and cesses impacting the relationship between the Centre and states?
The growing reliance on surcharges and cesses by the Centre has strained the relationship between the central government and states. States argue that these additional taxes, which are not part of the divisible pool, unfairly limit their financial resources. This has created a sense of fiscal imbalance, as states are expected to fund critical public services like health and education with a shrinking share of central revenues. Southern states, in particular, have raised concerns about the long-term sustainability of this practice and have called for the inclusion of surcharges and cesses in the divisible tax pool.
Sunil Garnayak is an expert in Indian news with extensive knowledge of the nation’s political, social, and economic landscape and international relations. With years of experience in journalism, Sunil delivers in-depth analysis and accurate reporting that keeps readers informed about the latest developments in India. His commitment to factual accuracy and nuanced storytelling ensures that his articles provide valuable insights into the country’s most pressing issues.
