Informist, Tuesday, Sep 10, 2024

By Priyasmita Dutta

NEW DELHI – States in south India have asked the Arvind Panagariya-led 16th Finance Commission for an increase in their share in the divisible pool of taxes to 60% from the current 41%, while also pitching for using population density, migration, and disaster management as parameters to decide the same, Informist has learnt.

According to an official privy to the recent discussions between the Finance Commission and representatives from Andhra Pradesh, Karnataka, Kerala, Tamil Nadu, and Telangana, the states have argued that they receive around 30% of total funds collected as taxes and cess, as against the mandated 41% of the divisible pool.

"States have sought higher devolution from the current 41%. Karnataka sought almost 60%...a few others too. But they want at least 50% as part of vertical devolution, the official added.

Vertical devolution refers to the distribution of net tax proceeds between the Centre and the states. So far, the discussions have been one way, with the Finance Commission's team expected to hold detailed meetings with the Centre as well as states only after a thorough study and then make its recommendations. The Commission is to submit its report on the layout of Centre-state financial relations for five years starting 2026-27 (Apr-Mar) by the end of October 2025.

The ongoing talks are the latest point of conflict between the Centre and states over the amount the former shares with the latter. According to a study by the Reserve Bank of India on state budgets for 2023-24, the increase in cesses and surcharges has led to the divisible pool declining from 88.6% of gross tax revenue in 2011-12 to 78.9% in 2021-22 even though the tax devolution figure was raised by 10 percentage points to 42% by the 14th Finance Commission.

The percentage was lowered to 41% by the 15th Finance Commission after Jammu & Kashmir lost its statehood and was divided into two Union Territories in 2019.

States are gearing up for a fresh battle, with Kerala set to host a 'fiscal conclave' on Thursday in Thiruvananthapuram. The conclave will be attended by representatives from Tamil Nadu, Karnataka, Telangana, and Punjab as well as economic experts, with the objective of formulating a common stance to present to the 16th Finance Commission.

NORTH-SOUTH DIVIDE

Another long-running grouse shared by the southern states is that the funds they get from the Centre are not just lower than their contribution to the overall tax collections, but also do not reward their relatively better economic performance compared to their counterparts in the north.

The issue erupted afresh in 2023 ahead of several assembly polls as well as the Lok Sabha elections and seemingly came to a head days after the interim Budget was presented on Feb 1 when Karnataka Chief Minister Siddaramaiah protested in New Delhi against "unfair treatment in tax devolution" by the Centre. Leaders from Kerala and Tamil Nadu joined what was called the 'South Tax Movement'.

As per the latest discussions, the southern states want certain new parameters to be used to decide the distribution of tax revenue among states, with the most controversial among them being population density.

POPULATION AND DEVOLUTION

The horizontal devolution – or the distribution of money between states – hinges on a set of criteria which are assigned certain weights: population (15.0%), demographic change (12.5%), area (15.0%), forest cover (10.0%), income distance (45.0%), and tax effort (2.5%). The criteria and weights can change from one commission to the other.

Not only do the southern states want a higher weight for demographic change, but also a change instituted by the 15th Finance Commission to be walked back.

In a departure from the past, the 15th Finance Commission used the 2011 census to decide the tax distribution, with a separate factor to reward control of population. This move meant higher the population of a state as per the latest census, that state would get more funds from the Centre. This irked many southern states that have over the decades brought their population sharply under control.

The previous commissions used a combination of the 1971 and 2011 censuses with a higher weight being given to the former to incentivise states to control population growth.

While the Finance Commission has told the states that it will look into the feasibility of using population density to determine weights, the aforementioned official said the bigger issue is the lack of clarity regarding the census year. The Terms of Reference of the 16th Finance Commission do not mention a specific census year that must be used to form the basis of its recommendations.

MIGRATION AND DISASTERS

A focus on population density would also help take into account the issue of migration. Karnataka, for instance, highlighted the high level of migration it receives from all parts of the country, the official said. While the influx of talent and labour is a function of a state's

attractiveness and allows it to increase its contribution to the national GDP, it also exerts pressure on the infrastructure. Both these factors warrant attention from the Finance Commission, the state argued.

The management of disasters has also been brought up as a crucial consideration in the discussions. Funds for disaster management have been given to states as grants-in-aid.

With natural disasters becoming more frequent and their economic impact stretching on for multiple quarters, states want disaster management to also be a parameter while deciding horizontal distribution of tax revenue as it would allow for a continuous flow of funds from the Centre.

"Southern states, especially Kerala, have faced many weather-related disruptions. So, they have requested to consider how a state manages disaster to be taken as a parameter to calculate the devolution formula while also taking into account the probability of disasters in a particular state," the official said. End

Edited by Vandana Hingorani

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