Pointing out Karnataka’s contribution to national GDP, the Revenue Minister said the state has about 5% of the Union’s population, yet contributes to 8.4% of national GDP. He was speaking at the Finance Ministers’ conclave hosted by Kerala on fiscal federalism.
Published Sep 12, 2024 | 10:56 PM ⚊ Updated Sep 12, 2024 | 10:56 PM
The Krishna Byre Gowda-led sub-committee will undertake a joint survey. (Wikimedia Commons)
Karnataka Revenue Minister Krishna Byre Gowda criticised the Union government’s tax devolution approach, advocating for a recalibration to balance equity with incentives for progress. States that have functioned with efficiency and advanced on all measures of progress must not be penalised, he said.
Minister Krishna Byre Gowda was addressing the ‘Conclave of Finance Ministers’ organised by the Kerala government at Thiruvananthapuram on Thursday.
“Whatever efforts we are making here to express our collective interest and advocate for justice cannot be served by a one-time attempt,” the Karnataka minister said.
“The last time we met in Thiruvananthapuram, we made our case, and as the saying goes, ‘We propose, they dispose.’ The previous Finance Commission contemptuously disregarded our concerns and proceeded with gross injustice to all those represented here. This time, we cannot afford to be optimistic or naïve,” Byre Gowda said, suggesting that the next conclave of finance ministers of states seeking fairer devolution of tax revenues be held in Karnataka.
“Those of us who contribute enormously to the Union’s cause — by strengthening the Union through financial contributions, job creation, and opportunities, and by contributing disproportionately to the national GDP — deserve justice,” he said, citing also the Tamil Nadu finance minister who addressed the audience before him.
“We are hardcore unionists, despite what some outside this hall may say. We want our Union to succeed and be the best in the world. For that to happen, all its constituent parts must be treated justly. There should be reciprocation for what we contribute to the Union,” Krishna Byre Gowda said, adding that equal reciprocity was not even sought.
“We are willing to share what we have with others who may not have as much. We are willing to be net contributors. However, to continue contributing to the Union, we must also thrive. If we do well, we can contribute a disproportionately larger share to the Union.”
Pointing out Karnataka’s contribution to national GDP, the Revenue Minister said, “Karnataka has about 5% of the Union’s population, yet our contribution to the national GDP is 8.4%.”
“When we look at our tax contributions — indirect taxes, which are well-quantified —Karnataka, with 5% of the population, contributes 9.54% to the national GST pool,” Byre Gowda said.
He continued: “We estimate that Karnataka contributes approximately Rs 4.5 lakh crore annually in all forms of taxes — direct and indirect — combined. In return, we receive approximately Rs 40,000 to Rs 45,000 crore in the form of devolution and another Rs 15,000 crore in Centrally Sponsored Schemes.”
“Against Rs 100 contribution to the Union, we receive about Rs 14 to Rs 15 in return. Some states contribute Rs 100 and receive perhaps Rs 300 or Rs 400 in return.”
“My quarrel is not with anyone else; I seek justice. I am not seeking a 100% return, but I am seeking an increase in my share to 20% to 25% of what I contribute,” Byre Gowda explained.
Expressing unhappiness over the 15th Finance Commission, he said: “The 15th Finance Commission did a great injustice to some of the states represented here, including Karnataka. The worst cut by the 15th Finance Commission was reserved for Karnataka. In one drastic swoop, our share of devolution was cut by 23%.”
“Kerala faced a similar situation but received about Rs 37,000 crore in revenue deficit grants, which Karnataka did not get. The chairman of the previous Finance Commission may have taken pity on Karnataka for the injustice done, and in a condescending manner, recommended about Rs 11,495 crore in special grants to Karnataka, almost as if it were alms.”
“The Union Government, as if the injustice done by the Finance Commission wasn’t enough, stepped in and delivered a further blow to Karnataka. The Union government’s most unkind cut was reserved for Karnataka when it dishonoured the Finance Commission’s recommendation and refused to give Rs 11,459 crore,” Byre Gowda said, terming it a double or even triple whammy.
“On top of this, we are told we have a strong economic base and should mobilise our own resources. But then, I am here, as is Arvind Subramanian (former chief economic advisor to the Government of India) and Chetan (who is this?) – he was a bit more cautious than naïve me. We all happily surrendered ourselves to the GST system, and while I am happy with the decision, we are now facing the consequences,” the Revenue Minister said, clarifying that he was not against GST.
Stating that GST affected the revenue of Karnataka, Minister Krishna Byre Gowda said: “When speaking about GST, using Karnataka as an example, we estimate that prior to the introduction of GST and today, about six or seven years after its introduction, a state like Karnataka loses about Rs 20,000 to Rs 22,000 crore every year.”
“Apart from Punjab, which had a unique situation where their mandi tax was subsumed without replacement, Karnataka is the worst affected post-GST implementation,” Byre Gowda said.
“Our tax collections have gone up, but what we get to retain of it has gone down relative to our needs, due to the way GST is structured,” Byre Gowda explained.
He said the state also has few sources of revenue generation. “Our hands are tied in indirect taxes as well. What we have left are some limited resources like liquor, fuel, and a few others, which have a limited ability to support our growing needs.”
He pointed out that Karnataka has a record of good performance. Our per capita income is high, our development is strong, and human development is a priority. Kerala tops the country in human development because it has made significant investments in these sectors.”
“However, these investments need to be continuous to maintain the social, economic, and human infrastructure that the whole country needs. The welfare of these states is crucial not only for their own sake but also for national progress,” Byre Gowda said.
“The 14th Finance Commission raised the devolution to 42%, but the 15th Finance Commission brought it down to 41%. As many of my colleagues have pointed out, the Union Government has, over the last 10 years, usurped a lot of indirect tax revenues through cesses and surcharges, particularly on fuels.”
“As a result, when you look at the gross tax revenue of the Union, what is actually devolved to states is less than 32 percent, not 41 percent. In previous Finance Commissions, the difference between what was recommended and devolved was three or four percentage points.”
“Now, it is a full 10 percentage points that is refused to be devolved to the states due to the exploitation of cesses and surcharges by the Union Government. To illustrate, during the last five years, Karnataka has lost about Rs 53,000 crore due to the exploitation of cess and surcharges by the Union Government,” the Revenue Minister said, suggesting that cess and surcharges above 5 percent should become part of divisible pool.
Revenue Minister Krishna Byre Gowda said: “We have made representations to the Finance Commission on the issue of cesses and surcharges.”
“We understand there is a constitutional provision and justification for cesses and surcharges, but the Comptroller and Auditor General of India has pointed out several times that the Union Government is misusing cesses and surcharges, not using them for their intended purposes, and in fact, diverting them.”
“We have therefore requested that the Finance Commission recommend capping cesses and surcharges at 5%. Any cesses or surcharges above 5% should become part of the divisible pool. Otherwise, the Centre will continue to deprive states of their rightful share of Union revenue through the route of cesses and surcharges,” Byre Gowda said.
On horizontal devolution across states, the Revenue Minister said: “Coming to horizontal distribution, this is where most of us have lost out. As I said, what we contribute, we get back about 15%, but we are very happy to transfer resources to other states that require them.”
“However, we seek a balance between equity considerations and performance and progress. Otherwise, we are concerned about the risk of creating a situation of moral hazard if we continue to transfer resources without any incentive for progress from the receiving states,” Byre Gowda said, pushing for incentives for the progress of states.
Minister Krishna Byre Gowda said: “The Constitution’s Directive Principle, Article 38, requires the Union Government to minimize inequalities in income and strive to eliminate inequalities among states, regions, and all Indians.”
“This principle underpins the idea of cross-transfers. As Arvind Subramanian pointed out, in the 1960s, the poorest state was at minus 30% of the median income, while the richest state was at plus 30%.”
“After 50 years of redistribution, where have we ended up? The gap between the states has increased, with the poorest state now at minus 60% and the richest at plus 90%. In light of this experience, we appeal that progress, performance, and efficiency should not be penalised, as has been the case with every Finance Commission,” Byre Gowda said.
He explained that penalising a state for good performance would act as a disincentive for improvement. Also, unchecked rewards for poor performance would create a perverse incentive not to progress – he pointed to the lack of progress among recipient states, which were not represented at the conclave.
“We have proposed that there should be a cap on the penalties for performing states and the rewards for receiving states, ensuring a manageable bandwidth for redistribution. We are not calling for the elimination of equity or redistribution — far from it,” the Karnataka minister explained.
“We believe in redistribution and equity. However, this equity must be balanced with incentives for progress and performance. We seek recalibration, a balance between equity and performance.”
To balance equity without punishing good performers, the Karnataka minister offered two suggestions to the Finance Commission.
“First, quantify the tax contributions our states make to the Union. GST data is available, and direct taxes can also be quantified. At least 60% of a state’s contribution to the divisible pool should be devolved back to that state. The remaining 40% can be redistributed,” Byre Gowda said, adding that these suggestions have already been made to the 16th Finance Commission.
Alternatively, if that methodology is complicated, he proposed another method.
“At least 25% of the divisible pool should be devolved to states based on the principles of efficiency, progress, and performance. The remaining 75% can then be redistributed. We do not propose eliminating redistribution or equity considerations, but we want to balance them with efficiency and performance,” the Revenue Minister said.
“We seek justice, fairness, and federalism that rewards progress, not penalises it. Let us ensure that this country prospers by encouraging all states to perform and contribute to the Union’s overall success,” Byre Gowda said, inviting the guests to a continuation of this conversation at a conclave on fiscal federalism in Karnataka.
(Edited by Rosamma Thomas)
