Why Karnataka, Kerala are clamoring for tax devolution share; Center states debate decoded

The Karnataka government led by Congress MP Siddaramaiah has come out strongly against the central government this time, demanding a reduction in tax share, which he claims has resulted in a loss of over Rs 45,000 crore to the state in the past four years. .

The chief minister also introduced the “North-South divide” debate to highlight the Center’s “injustice” in being generous to northern states in the budget and to Karnataka in “tax devolution”.

First, let’s understand what tax decentralization is.

This is the net proceeds of federal taxes and duties allocated by the Center to states under tax devolution on the 10th of every month. It helps countries with expenditure on development, welfare and priority sector projects and programmes. Currently, 41 per cent of the tax collected by the Center is distributed to states in 14 installments in a financial year.

The funds are allocated to states based on a predetermined formula that takes into account factors such as population, area and fiscal capacity. Uttar Pradesh received the highest allocation of Rs 13,088 crore from the Centre, while Bihar was in second place, receiving an additional tax devolution installment of Rs 72,961.21 crore.

Karnataka protests

Siddaramaiah alleged that the Center was giving them “stepmotherly treatment” in terms of interim budget allocations and called for a protest in New Delhi on February 7. Securing the welfare of our state…the taxes owed by the northern states to the southern states can never serve as an example to us. Everyone should get over this misconception. Karnataka is working hard to build a strong state and is a model for India. “

The Karnataka government claims that not even one of the 61 projects promised by the Center to 23 ministries and departments in Karnataka has been funded. The Union government in its last budget said it would provide Rs 5,300 crore for Bengaluru’s Suburban Railway, Peripheral Ring Road and Upper Krishna projects. “We have not seen a penny,” Congress chief spokesman Natraj Gowda said.

The Karnataka government argued that in the 14th Finance Commission, the state received 4.71% of the total tax revenue, while in the 15th Finance Commission, the share had dropped to 3.64%. The 1.07 per cent reduction resulted in Karnataka’s share loss of Rs 45,000 crore in the past four years. If this year’s estimates are considered, the deficit over the five-year period would be Rs 62,098 crore.

The 15th Finance Commission in its interim report recommended a special allocation of Rs 5,495 crore to Karnataka. Besides, the final report also recommended an allocation of Rs 6,000 crore for the rejuvenation of ring roads and water bodies around Bengaluru. The total special allocation recommended by the 15th Finance Commission is Rs 11,495 crore.

FM cites Finance Commission recommendations

Finance Minister Nirmala Sitharaman clarified that tax devolution in some states was based on the recommendations of the Finance Commission and she “lacked discretion” to manipulate the recommendations.

She also mentioned the Goods and Services Tax (GST) and clarified that the State Goods and Services Tax (SGST) belongs exclusively to the states, while the Integrated Goods and Services Tax (IGST) is levied on inter-state payments and requires periodic review. She added that the CGST is divided based on the recommendations of the committee and the determination of rates has nothing to do with the Centre.

Other states are crying too

Kerala Finance Minister KN Balagopal, while presenting the state budget, was impressed by the growth in tax revenue from Rs 47,661 crore in 2020-21 to Rs 71,968 crore in 2022-23. He said revenue growth is expected to exceed Rs 78,000 crore this fiscal year.

The minister highlighted that Kerala has lost thousands of rupees due to the reduction in the share of divisible taxes collected by the Centre, which has reduced from 3.87 per cent in the 10th Finance Commission to 1.925 per cent in the 15th Finance Commission.

The LDF government expects revenue of Rs 1,38,655 crore and expenditure of Rs 1,84,327 crore. According to the budget documents, the revenue deficit is Rs 27,846 crore (2.12% of the state’s GDP) and the fiscal deficit is Rs 44,529 crore (3.4% of the GDP).

In the interim budget estimates for 2024-25, Tamil Nadu’s share of central taxes has been estimated at Rs 49,754.95 crore, which is 11.2 per cent higher than the revised estimate for 2023-24. According to the Union Budget documents, the actual devolution of central taxes to Tamil Nadu in 2022-23 is Rs 38,685.47 crore.

However, the DMK government said it got a much lower share. Finance Minister Thangam Thennarasu had explained last month that the state was getting only 29 paise for every rupee given to the Centre. He told The Hindu that while Tamil Nadu accounts for 6.1 per cent of the country’s population, its share in tax revenue has fallen from 5.30 per cent under the 12th Finance Commission to 4.07 per cent under the 15th Finance Commission %.

Tamil Nadu is expected to present its 2024-25 state budget on February 19.