Opposition-ruled states advocate for 50% share in central taxes

Thiruvananthapuram: Finance Ministers of Opposition-ruled states – Karnataka, Kerala, Punjab, Tamil Nadu, and Telangana – on Thursday strongly opposed the Union Government continuing to increase Cess and Surcharges, which they said will reduce the effective devolution of funds to be allotted under the 16th Finance Commission.

At the conclave of FMs of Opposition-ruled states hosted by Kerala Chief Minister Pinarayi Vijayan to draft a joint response to the Finance Commission on various issues, Karnataka Revenue Minister Krishna Byre Gowda suggested a five per cent cap on cess and surcharge, while all participants advocated for a 50 per cent share in the Central taxes.

All South Indian states opposed the Finance Commission’s formula of considering the 2011 population as the base line to allot funds, contending that they were being penalised for effectively controlling population, while states that have failed on the issue are unfairly rewarded.

"Last year, Karnataka lost around Rs 53,000 crore owing to Cess and Surcharge collected by the Centre. Hence, we have recommended a five percent cap on cess and surcharge. Any cess and surcharge collected beyond that should be made part of the divisible pool," Gowda said, as the participants deliberated on the need to put up a “united front.”

Tamil Nadu Finance Minister Thangam Thenarasu asked the states to jointly urge the Commission to ensure that reliance on discretionary grants is reduced and that predictable and objective resource transfers are increased.

“The Commission must devise a mechanism to restrict the use of cess and surcharges and recommend appropriate measures to protect the interests of States,” he said.

In his inaugural address, Vijayan said the levy of Surcharges and Cess by the Centre has witnessed an increase over the last 10 years, pointing out that states like Kerala have been nudging successive Finance Commissions to raise to 50 per cent of the net proceeds, the share of taxes to be distributed to states from the divisible pool.

Kerala Finance Minister K N Balagopal said Cess and Surcharges levied by the Centre which stood at 9.4 of the Union’s revenue rose to 22.8 per cent in 2022-23. Telangana deputy chief minister Mallu Bhatti Vikramarka and Punjab finance minister Harpal Singh Cheema also reiterated the demand for increasing the state's share from the divisible poll to 50 percent.

All five states expressed concerns over the “emphasis” that the Union Government lays on Centrally sponsored schemes, complaining that it was affecting the states' scope of implementing projects based on local needs.

Thenarasu said increase in the counterpart funding of State Governments in centrally sponsored schemes due to change in the sharing pattern has

resulted in a double blow to the States, which have reduced their fiscal space for existing and new state schemes for sectors mandated under the Constitution.

Karnataka suggested that the estimations could be even made based on contributions to GST or GSDP of the respective states, pointing out that his state gets a mere Rs 15 in return as Central allocation for every Rs 100 it contributes to the Centre’s tax kitty.

“However, some states that contribute Rs 100 as tax to the Centre are getting Rs 300 as Central allocation. We are the gooses that lay the golden eggs. Even then we are only demanding a marginal increase of 20 to 25 percent in return of the total contributions we make,” Gowda added.

Thenarasu echoed Gowda’s views and complained that Tamil Nadu is being penalised by Finance Commissions for having “performed well” with the state suffering a loss of Rs 3.5 lakh owing to a steep fall in devolution.

Thenarasu said all Commissions have to strike a fine balance between equity and efficiency when deciding the inter-se share of states, while warning that an excessive emphasis on redistribution will not only skew incentives in favour of non-performance, but also deprive fast growing regions of critical development resources.

“It is also important to point out that this approach of redistribution to poorer states has been adopted by every Finance Commission, but even with this approach, the desired levels of development in poorer States have not been achieved,” he said, and called for a “rethink” in the approach.

Financial experts like former chief economic advisor Arvind Subramanian and former Kerala finance minister T M Thomas Isaac took part in closed door deliberations held during the one day conclave.

(With inputs from ETB Sivapriyan in Chennai)