February 14, 2024
📰 FEATURE STORY
Are southern states in India right in protesting lower tax devolution?
There has always been some tension between the southern states in India (they’re non-BJP ruled) and the Union government over the allocation of money. Ever since the GST regime was introduced, several states have been unhappy with their revenue share.
As election season gathers steam, the southern states have turned up the heat against the Centre. They feel that they’ve been getting a raw deal concerning financial devolution. While they allege mistreatment by the Centre, the latter doesn’t buy it. Do the states have a point, or is it just political grandstanding?
Context
Before we delve into the states’ issues, let’s look at what tax devolution is. One of the core tasks of the 15th Finance Commission is to recommend the share of the distribution of the net proceeds of taxes between the Union and the states. It’s the predominant channel of resource transfer from the Centre to the states.
The Commission was set up in 2017 and submitted its report in 2021. The metric used to calculate how much each state gets was the 2011 census data. It was the first time the Commission used the 2011 census compared to the 1971 census used by the previous nine commissions.
In the aftermath of the interim budget presentation by Union Finance Minister Nirmala Sitharaman, the southern states felt betrayed. The Congress-led government in Karnataka alleged injustice to the state concerning tax devolution and grants-in-aid over the past several years. Chief Minister Siddaramaiah cited the denial of drought relief funds as 223 of the 236 of the state’s talukas have been suffering due to droughts.
Congress general secretary Jairam Ramesh accused the Centre of denying rice for the “Anna Bhagya” scheme after the government discontinued the direct sale of rice and wheat from the central pool to states. The “South Tax Movement” was born.
The thing we have to understand about this issue is India’s uneven development. Simply put, not all states develop equally. One side is made up of southern states that contribute more toward the national economy. They feel they need more money to keep up with increased demand, growth, expenditure, etc.
On the other are poorer states that feel the other side of the uneven development perhaps occurred at their cost. Another thing about India is that industrial concentration lies in the western and southern regions. It’s not as much in the central, eastern, and northern regions.
What does that mean? States like Uttar Pradesh and Bihar have some of the most impoverished districts. More developed states have populations whose living standards have increased. It’s why there’s a tendency for some leaders in the South to feel like they’re subsidising the North. In this context, do the southern states have a case on their hands as they protest?
VIEW: They have the right to feel slighted
The decision to use the 2011 census data by the Finance Commission upset the southern states. The bone of contention is that they’ll be punished for controlling their population. Take Karnataka as an example. Its share in India’s population has decreased from 5.34% to 5.05%. For Tamil Nadu, it has declined from 7.52% to 5.96%. They’ve both seen their share of allocated funds decline.
The states’ share in central taxes has been trending downwards, averaging 35.4% of the divisible pool from FY2021 to FY2025. What made matters worse for the states post the GST regime was that the states’ value-added taxes were eliminated. This only contributed toward a dwindling share of the total fund transfers. According to Siddaramaiah, Karnataka has allegedly lost over ₹62,000 crore over five years.
The amount of money given to states over the past few years has decreased compared to the recommended levels by the 15th Finance Commission. This was validated by a note from India Ratings and Research. Per the Commission’s recommendation, 41% of the divisible tax pool should be transferred to states in 14 instalments from 2021-22 to 2025-26. In FY2025, the Centre budgeted to share only 35.5%.
COUNTERVIEW: Not a prudent ask
While the states are protesting against the government, the Centre has little to no role to play in this. The Finance Commission is an independent body. The Finance Minister clarified this and stated that the entire amount collected as State Goods and Services Tax (SGST) goes to the states. The issue that needs to be tackled is the uneven development and perhaps a better formula to be used by the Finance Commission.
But given the states are unhappy, they also need to be fiscally prudent. Mumbai contributes a significant amount to the total direct tax collection amount. It would be silly for Mumbai to ask for more money and be treated separately from Maharashtra. The tax devolution formula works on the principle of ‘rich states pay for the poor states’. The 14th and 15 Finance Commissions accounted for Karnataka’s improved performance and allocated ₹1,51,309 crore and ₹1,29,854 crore, respectively. This will increase to over ₹1.7 lakh crore at the end of the fifth year.
Every state gets a certain amount of money from the central pool. It’s on each state to keep its finances in order and refrain from undertaking any reckless or unnecessary spending, certainly not beyond its means. However, some state governments have implemented freebies, owing to the upcoming election, that drain the state’s coffers. They then have no option but to ask for more money.
Reference Links:
- South vs Centre | Financial devolution or fair treatment — why the Southern states are protesting – CNBC TV18
- South Tax Movement: Why Southern States Are Protesting Against The Union Government – Explained – Outlook
- Rage of the Fast and Furious – Outlook Business
- Population, GST lie in the heart of India’s North, South money wars over central funds – Moneycontrol
- Fiscal injustice is the charge, and sentiments matter more than logic – Deccan Herald
- Tax for Dividing The Nation or Developing? – News18
What is your opinion on this?
(Only subscribers can participate in polls)
a) The southern states in India are right in protesting lower tax devolution.
b) The southern states in India are wrong in protesting lower tax devolution.
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