For quite some time now, leaders from the southern states, particularly Tamil Nadu, have accused the Centre of not being fair in the allocation of funds. The focal point of contention lies in changes in the tax devolution policies, particularly with the introduction of the Goods and Services Tax (GST) and the criterions adopted by the 15th Finance Commission. Before we delve into the distribution of taxes, it is important to understand how the policy decisions have negatively impacted southern states and destroyed their fiscal autonomy in the federal structure.
Before GST, states enjoyed autonomy in deciding value-added tax rates, allowing them to adjust taxation according to their fiscal needs. However, the introduction of GST made them rely on the Union government for the distribution of funds. When GST was introduced, the Centre had assured states of 14 percent increase in tax revenues and fair compensation for any losses during the transition. The GST Compensation Cess was imposed and the southern states are supposed to receive the highest compensation as they tend to contribute more to the divisible pool.
However, the GST compensation to states was stopped last year, though the GST compensation cess introduced for the purpose is still being collected by the Union government; meanwhile states including Tamil Nadu are facing annual losses exceeding Rs 20,000 crore.
To make the matter worse, the 15th Finance Commission exacerbated the divide by using the 2011 population census as the determinant for tax devolution. The shift from the previous commission's methodology, which included a blend of the 1971 and 2011 censuses, was intended to reward states for effective population control measures.
However, the reliance on the 2011 census has led to a scenario where states with larger populations, such as Uttar Pradesh, receive a substantially higher share, leaving the less populous southern states at a disadvantage. Uttar Pradesh received 18 percent of the devolved taxes, whereas Tamil Nadu got 4.2 percent, Karnataka 3.65 percent, Telangana 2.13 percent, Andhra Pradesh 4.11 percent, and Kerala got 1.96 percent.
Tamil Nadu sports minister Udhayanidhi Stalin, a vocal critic of this perceived disparity, questioned Finance Minister Nirmala Sitharaman on the issue and called for fairness for the southern states. In line with these concerns, I raised a question in parliament during the last session, seeking detailed data on GST, direct and indirect taxes paid by states to the Union government, as well as on the funds allocated to each state as part of central taxes over the last five years.
To my shock, the data provided by the Union finance ministry on February 6 as answer to my question No 362 revealed that while Tamil Nadu, Andhra Pradesh, Karnataka, Telangana and Kerala collectively contributed over Rs 22.26 lakh crore through GST and direct taxes (excluding GST) in the past five years, only Rs 6.42 lakh crore has been devolved. In stark contrast, Uttar Pradesh contributed only Rs 3.41 lakh crore during the same period and was allocated a whopping Rs 6.91 lakh crore.
I have asked whether the government has considered changing the allocation formula to address the concerns of disparity. No answer has been provided to the question, contrary to the Rajya Sabha rules stipulating that answers should be specific and complete.
Furthermore, when examining the proportion of central taxes and duties released to states, for every rupee paid in GST and direct tax, Tamil Nadu on average between 2018-19 and 2022-23 received only 26 paise, Karnataka 19 paise, Kerala 62 paise, Andhra Pradesh 50 paise, and Telangana 40 paise. In fact, Tamil Nadu's share has fallen from 27 paise to 24 paise betwee 2018-19 and 2022-23, Karnataka's from 22 paise to 12 paise, Telangana's from 60 paise to 31 paise, Kerala from 81 paise to 50 paise, and Andhra Pradesh from 56 paise to 49 paise.
In contrast, Uttar Pradesh received a considerable Rs 2.02 for every rupee paid to the Union government, Madhya Pradesh got Rs 1.70 and Rajasthan got Rs 1.14. This clearly portrays the disparity between the southern states and some of the northern states.
These south Indian states receive approximately 25 percent of the share of what they contribute, whereas states such as Uttar Pradesh are allotted more than 200 percent. I am not suggesting that a large portion of the share should not be given to Uttar Pradesh or other northern states. My only concern is why the southern states are being given a lower allocation—why the bias towards them?
Why are the southern states are being punished for implementing good policies including measures to control population growth? It is high time that the allocation formula was re-considered and the southern states given their fair shares, as demanded by the southern leaders.
(Views are personal)
P Wilson
Senior advocate and member of parliament