Recommend capping cesses, surcharges at 5% of gross tax revenue: Karnataka CM Siddaramaiah to Finance Commission

Bengaluru: Karnataka Chief Minister Siddaramaiah on Thursday requested the 16th Finance Commission to recommend capping of cesses and surcharges at five per cent of gross tax revenue, and anything exceeding that should be a part of the divisible pool.

In his address to Chairman of the 16th Finance Commission Arvind Panagariya and its members at a meeting here, he also requested the panel to recommend that vertical devolution should be at least 50 per cent of the divisible pool.

All non-tax revenues of the Centre should be included in the divisible pool of taxes by bringing the necessary Constitutional amendment, Siddaramaiah said.

The Chief Minister said economically advanced States are committed to supporting poorer States, but this should not come at the expense of their own residents or economic efficiency.

The Commission needs to carefully examine the impact of extremely high emphasis given to equity on the incentives of well performing states.

"Moreover, the taxpayers of such states expect their taxes to work for them. This creates public trust. The Finance Commission therefore needs to do a tightrope walk while balancing equity with efficiency and performance", Siddaramaiah said.

Due to the disproportionate weightage given to equity by the 15th Finance Commission, Karnataka and similarly placed States ended up getting penalised for their good performance, both fiscally and demographically, the Chief Minister said.

Noting that cesses and surcharges are not part of the divisible pool, the Chief Minister said over the years, the Union Government has increased its reliance on them. This has led to the divisible pool not growing in the same proportion as the Gross Tax Revenue, he said. This has caused substantial loss to all the States.

The loss to Karnataka on account of the non-sharing of cesses and surcharges from the divisible pool is Rs. 53,359 crore during the period 2017-18 to 2024-25, according to him. The Chief Minister said reduction in central financial transfers is placing severe limitations on the ability of the States to invest in physical and human infrastructure, adding, this issue must be addressed urgently.

"Economically advanced States are committed to supporting poorer States, but this should not come at the expense of their own residents or economic efficiency," Siddaramaiah said. "A larger proportion of resources generated by the States should be shared with them." He requested the Commission to take a bold view and approach, whereby equity considerations are balanced with sufficient reward for efficiency and performance.

Karnataka recommends that 60 per cent of contribution of a state to the divisible pool, for inter se allocation among states, should be given to that state, Siddaramaiah said.

Karnataka, the Chief Minister said, has been central to India's growth story, adding, it contributes approximately 8.4 per cent to the national GDP with only about five per cent of the population. The State ranks second in total GST contribution to the country.

Despite Karnataka's substantial contribution of about Rs four lakh crore to the Gross Tax Revenue of the Union every year, the state gets about Rs 45,000 crore in the form of devolution and about Rs. 15,000 crore grant-in-aid.

"This means that for every rupee Karnataka contributes, only 15 paise is returned to the state," he pointed out.

The Chief Minister said Karnataka requires greater devolution by the Centre as it faces regional imbalances, especially in the Kalyana Karnataka region, and the challenges of urbanisation.

Bengaluru, Siddaramaiah said, needs an investment of Rs. 55,586 crore over the next five years out of which the State requested for a grant of Rs 27,793 crore.

Similarly, for the equitable development of the Kalyana Karnataka region, the State is investing Rs 25,000 crore and requested a matching grant of Rs.25,000 crores over five years from the 16th Finance Commission.

To ensure effective disaster mitigation and timely relief and rehabilitation measures in the highly vulnerable region of Western Ghats, the State requested a grant of Rs.10,000 crore.

According to him, the 15th Finance Commission’s award reduced Karnataka’s share sharply from 4.713 to 3.647. This has led to a loss of Rs. 68,275 crore during the five-year period from 2021-26, he said.

The Finance Commission was conscious of the drastic cut Karnataka received and recommended state specific grants of Rs.11,495 crore, the Chief Minister said, adding, the Government of India, however, has not accepted the recommendation.

"So, Karnataka was deprived of these grants as well. The total of all the losses amount to Rs 79,770 Crores during the 15th Finance Commission period,", Siddaramaiah said.

Karnataka, he said, has seen a revenue transfer of Rs 35,000-40,000 crore per year to other States, amounting to 1.8 percent of its GSDP, during the 15th Finance Commission period.

"The figure is astounding because the net transfers outside of Karnataka amount to about 50 to 55 percent of the total revenues it generates."