This is the concluding report of a 3-part series on fiscal federalism that explains why well performing states are accusing the Union government of fiscal injustice.
CM Siddaramaiah addressing the protest against the Union government at Jantar Mantar, Delhi. (Supplied)
Alleging fiscal injustice, South Indian states are demanding an equitable share of resources from the Union government. With Karnataka, Tamil Nadu, Kerala, and Andhra Pradesh raising the chorus for the South Tax Movement, the demand to preserve fiscal federalism is growing stronger. South First brings to you a three-part series on fiscal federalism that explains why well-performing states are accusing the Union government of fiscal injustice. This is the concluding part of the series, showcasing the glaring gap between the southern states’ contribution, and how much they receive in comparison with the top five receiving states — three of which are in the Hindi heartland. You can read the second part that explained how the southern states received consistently reduced funds from the Union government over five fiscals here. The first part explaining how much southern states have contributed to the country’s revenues in the last five years can be accessed here.
The vote-on-account Union Finance Minister Nirmala Sitharaman presented on 1 February 2024 showed five states, Uttar Pradesh, Bihar, Madhya Pradesh, West Bengal, and Maharashtra, receiving the highest shares from the central pool of taxes and duties.
Among the leading five recipients, Maharashtra is the only state contributing a significant share of GST, Cess, and direct taxes to the Center. Uttar Pradesh, Bihar, and Madhya Pradesh form the Hindi heartland, a region that consistently influences electoral outcomes.
None of the southern states figures among the top seven recipients. Tamil Nadu receives the eighth highest share — 4.07 percent — from the central pool of taxes.
The list of the states’ shares divulged that Uttar Pradesh has been receiving an estimated ₹2,18,816.84 crore as its share from the central pool.
State-wise share from central pool of taxes for fiscal 2024-2025 as per Union interim budget.
The amount is over ₹26,000 crore more than the share of all the five southern states — Karnataka, Tamil Nadu, Telangana, Andhra Pradesh, and Kerala — combined. Together, they receive ₹1,92,725.7 crore. This has been the trend for several years.
The well-performing states, especially from the South, have raised concerns over fiscal injustice, demanding an equitable share of resources. The demand for fiscal justice in the spirit of fiscal federalism comes even as the 16th Finance Commission is taking shape.
The commission decides the quantum of share from the central pool of taxes. The well-performing states demand that the yardstick for deciding the percentage should not be an excuse to punish them. States such as Karnataka not only perform better than their Hindi-heartland counterparts in human development indices but also consistently contribute increasing revenue.
An analysis of contribution and returns from the financial year 2018-2019 to 2022-2023 showed the southern states consistently contributing more to the country’s revenues but received much less in return.
Whenever there was an increase in the shares provided to them, they have been marginal, when compared to the sharp increase in the allowances of Uttar Pradesh, Bihar and Madhya Pradesh in the Hindi heartland.
Inversely, the three states have consistently contributed less but received increasingly higher shares, in absolute numbers as well as percentages from the total kitty.
The Union Finance Ministry data presented in Parliament showed that the concerns of fiscal injustice and demand for fiscal federalism raised by states like Karnataka, Kerala, and Tamil Nadu were not unfounded and needed immediate attention.
Comparison of how much states contributed towards revenue in 2018-2019 and 2022-2023.
With 17.9 percent of the share from the central tax pool, Uttar Pradesh was the biggest beneficiary despite contributing less than seven percent to the country’s revenues in the form of GST, Cess, and Direct taxes, the Finance Ministry said in its response to Parliament.
In 2018-2019, Uttar Pradesh’s GST+ Cess and Direct tax collection accounted for barely 6.9 percent and 2.4 percent, respectively. In 2022-2023, it dropped to 6.6 percent and 2.3 percent, respectively. Yet, Uttar Pradesh received 17.96 percent from devolution in 2018-2019 and 17.89 percent in 2022-2023.
Bihar received a 9.6 percent share from central taxes in 2018-2019 while its contribution to revenues in GST+Cess was 1.2 percent and direct tax was 0.5 percent. By 2022-2023, Bihar’s share increased 10.07 percent despite its contribution to GST+Cess remaining at 1.2 percent and direct tax dipping to 0.4 percent.
Madhya Pradesh in 2018-2019 received 7.5 percent of central taxes while its GST+Cess collection was just 2.9 percent and direct tax accounted for 1.7 percent of the total revenue. The state received 7.8 percent from the central pool in 2022-2023 though its GST+Cess collection dropped to 2.7 percent and direct tax to 1.2 percent.
The biggest loser in terms of absolute funds as well as percentage, with a yawning gap between the contributions and returns, is Karnataka. The state has consistently contributed more but received less from central shares.
Comparison on how much states have received from central pool of taxes in 2018-2019 and 2022-2023.
In 2018-2019, Karnataka received 4.7 percent of the total devolution. The same year, Karnataka’s GST+Cess collections stood at 8.9 percent and direct tax at 10.75 percent. By 2022-2023, Karnataka’s share had reduced to 3.6 percent despite its GST+Cess collection shooting up to 9.26 percent and direct tax to 12.86 percent of total revenues.
Tamil Nadu’s share in 2018-2019 from the central pool was 4.02 percent when its GST+Cess accounted for 8.04 percent and direct tax collection, 6.6 percent. By 2022-2023, its share stood at a marginal 4.08 percent. The state’s GST+Cess collection was then pegged at 7.87 percent and direct tax collection at 6.6 percent.
In 2018-2019, Telangana’s share from the central pool was 2.4 percent. Its GST+Cess collection during the same period accounted for 4.1 percent and direct tax was 0.97 percent of the country’s revenue. By 2022-2023, Telangana’s share from devolution fell to 2.07 percent while its GST+Cess collection slipped to 3.91 percent but direct tax rose substantially to 2.1 percent.
Kerala, too, has been a big loser in terms of devolution. In 2018-2019, Kerala’s share of devolution was 2.5 percent. During that financial year, the state accounted for 1.8 percent GST+Cess and 1.5 percent direct tax. By 2022-2023, Kerala’s share from the central pool was reduced to 1.9 percent despite its GST+Cess collection rising to 2.06 percent and direct tax marginally reducing to 1.4 percent.
In 2018-2019, Andhra Pradesh’s share from the central pool stood at 4.3 percent. Its GST+Cess accounted for 2.88 percent and direct tax, 4.1 percent of the revenues. By 2022-2023, its share reduced to 4.02 percent while its GST+Cess collection increased to 3.03 percent and direct tax dipped to 3.5 percent.
The trend confirms the fears raised by the well-performing states that they were being shortchanged. The reduced Grant-in-aid, hike in Cess and surcharge that was not added to the divisible pool of taxes are the other concerns of such states.
The increasing disparity between the well-performing states’ contributions and what they receive vis-a-vis the underperforming states forms the crux of the issue.
The demand to preserve fiscal federalism has led Karnataka to start a campaign, #MyTaxMyRight, and Kerala to bring together political leaders from other regions as part of the South Tax Movement.
May 02, 2024
May 02, 2024
May 02, 2024
May 01, 2024
May 01, 2024
May 01, 2024
