The Karnataka government led by Congress’ Siddaramaiah is up in arms against the Centre, this time, for reduced share in the tax revenue pie, which, he claims, has resulted in a loss of over Rs 45,000 crore to the state in the last four years.
The chief minister also brought in the “north-south divide” debate to highlight how the Centre was being generous to the Northern states in the budget, while “injustice” was being done to Karnataka in “tax devolution”.
First, let’s understand what is tax devolution.
It is the distribution of net proceeds of Union taxes and duties by the Centre to the states on 10th of every month. It helps states carry out spending on development, welfare and priority-sector projects and schemes. At present, 41% of taxes collected by the Centre is devolved in 14 installments among states during a fiscal year.
The funds are allocated to the states based on a pre-defined formula, which considers factors such as population, area and fiscal capacity. Uttar Pradesh received the highest grants from the Centre at Rs 13,088 crore, while Bihar was second at Rs 7,338 crore out of an additional installment of tax devolution of Rs 72,961.21 crore.
Karnataka Protests
Siddaramaiah has alleged step-motherly treatment meted out to Karnataka by the Centre in terms of granting funds in the Interim Budget 2024-25, and has called for a protest in New Delhi on February 7. “We stand united in demanding fair treatment and justice for Kannadigas to secure our state’s welfare… The northern states, which are indebted to taxes paid by southern states, can never be a model for us. Everyone should get over this false idea. Karnataka, which is building a strong nation with hard work, is a model for India,” he said.
The Karnataka government claims that of the 61 projects that the Centre had promised for Karnataka under 23 ministries, funds have not been released for even one. The Union government had said in the last Budget that it would release funds for the suburban rail, peripheral ring road in Bengaluru, and Rs 5,300 crore for the Upper Krishna project. “We have not seen a penny,” said Congress chief spokesperson Natraj Gowda.
The Karnataka government argues that in the 14th Finance Commission the state received 4.71% of total taxes, while it has been reduced to 3.64% in the 15th Finance Commission. The reduction of 1.07% has resulted in a Rs 45,000 crore loss to Karnataka’s share over the last four years. If this year’s estimates are taken into account, then this deficit will be Rs 62,098 crore for the five-year period.
The 15th Finance Commission recommended special grants of Rs 5,495 crore to Karnataka in its interim report. Additionally, the final report also recommended Rs 6,000 crore for Bengaluru’s peripheral ring road and the rejuvenation of water bodies. The overall special grant recommended by the 15th Financial Commission totals to Rs 11,495 crore.
FM Cites Finance Commission Recommendations
Finance minister Nirmala Sitharaman has clarified that the tax devolution of some states was based on Finance Commission’s recommendations, and she “lacks the discretion” to manipulate them.
She also referred to Goods and Services Tax (GST), and clarified that State Goods and Services Tax (SGST) goes entirely to the states, while Integrated Goods and Services Tax (IGST) is collected due to interstate payments and is subject to periodic review. She added that CGST is divided as per the commission’s advice, and rate fixation is unrelated to the Centre.
Other States Cry Too
Kerala finance minister KN Balagopal, while presenting the state budget, impressed upon growth in tax revenue from Rs 47, 661 crore in 2020-21 to Rs 71,968 crore in 2022-23. He said the revenue growth is anticipated to rise to more than Rs 78,000 crore in the current fiscal.
The minister stressed that Kerala lost tens of thousands of crores due to the decreasing share of the divisible pool of tax collected by the Centre and the share was reduced from 3.87% in the 10th Finance Commission to 1.925% in the 15th Finance Commission.
The LDF government expects a revenue of Rs 1,38,655 crore, while the expenditure is pegged at Rs 1,84,327 crore. The revenue deficit stands at Rs 27,846 crore (2.12 percent of the state’s GDP), while the fiscal deficit is Rs 44,529 crore (3.4 percent of GDP), according to the budget document.
In the interim Budget estimates for 2024-25, Tamil Nadu’s share of Central taxes is estimated to be Rs 49,754.95 crore, which is 11.2% higher than the revised estimates for 2023-24. The actual devolution of Central taxes to Tamil Nadu for 2022-23 stood at Rs 38,685.47 crore, according to the Union Budget documents.
The DMK government, however, had said it is receiving much lower share. Finance minister Thangam Thennarasu last month explained that the state received only 29 paise for every rupee it gave to the Centre. He told The Hindu that while Tamil Nadu accounted for 6.1% of the country’s population, its share in the pool of taxes had reduced from 5.30% under 12th Finance Commission to 4.07% in the 15th Finance Commission.
Tamil Nadu is expected to present the state budget for 2024-25 on February 19.
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