Finance Commission to disregard Karnataka's demand on income calculation

Bengaluru: The Sixteenth Finance Commission (16th FC), which is slated to visit Karnataka later this month to hold meetings with the political leadership, is likely to reject two key demands from the state, DH has learnt from sources aware of the deliberations in the Constitutional body.

In a written communication to the Union Finance Ministry last year, the Karnataka government had asked that southern states be rewarded for taking in migrants from other states, and given that the impact of some metropolitan areas on the per capita income of certain states is significant, the 16th FC should consider excluding cities like Bengaluru, Hyderabad, Kolkata, etc, so as to arrive at a more accurate per capita income level for the respective states.

Neither of these will be taken into consideration by the 16th FC when it decides on the distribution of the divisible tax pool between the Centre, states and union territories for five years - 2026-27 to 2030-31.

“If the major financial centres or capital cities of a state are removed from a state’s income calculation, then it will present a skewed picture and will impact devolution of funds. It is also difficult to calculate,” said a source.

A second person aware of 16th FC’s work said that the state government’s request that it be rewarded for taking in economic migrants from other states could be a political stunt, and cannot be taken seriously in a federal set-up like that of India.

The 16th FC, let by Chairman Arvind Panagariya, will hold meetings with Chief Minister Siddaramaiah and officials of the Finance Department.

Karnataka had said in its written communication last year that it wants its economic development and urbanisation to be taken into account while deciding the state’s share of central tax revenues and various grants, given the fact that it receives a lot of workforce from relatively less-developed states, and the income that economic migrants earn also helps their home states.

The divisible pool consists of all the central direct and indirect taxes, including income and corporate taxes, goods and service tax, customs and excise duties, but excludes cesses and surcharges, which the centre need not share with states. For the five-year period, the 16th FC will also decide various grants and rewards to states, like other finance commissions before it.

The demands by southern states have accompanied the work of the past few finance commissions. This is part of a larger political narrative where many southern and western states feel that they are in effect subsidising poorer northern and eastern states.