Voices of condemnation are being raised from various states, claiming that the Union government’s budget allocation has been unfairly distributed, particularly to states ruled by opposition parties, including Tamil Nadu.
For instance, Rs 15,000 crore has been allocated for the construction of Amaravati, the capital of Andhra Pradesh. Finance Minister Nirmala Sitharaman mentioned in her budget speech that Rs 11,500 crore would be provided for disaster relief work in Bihar. This selective allocation has led to accusations that Prime Minister Narendra Modi is safeguarding his chair by providing special funds to Bihar and Andhra Pradesh.
Condemning the exclusion of Tamil Nadu from the budget, Chief Minister of Tamil Nadu boycotted the Niti Aayog meeting convened by the Prime Minister. Following his lead, the chief ministers of various states in the INDIA bloc also boycotted the meeting. Mamata Banerjee, who attended the meeting, walked out halfway through. Consequently, the issue of fund allocation to states has become a significant political issue.
The allocation of funds to the states is based on the recommendations of the Finance Commission. However, there is a problem. To ensure funds are being distributed as per the finance commission’s recommendation, we need to know the net tax revenue. The Union Government does not clearly state how much the net tax revenue is. In the Union Government’s budget, receipts and expenditure details are given separately with topic-wise breakdowns. However, the Union government does not specify how much revenue should be distributed overall. Similarly, the amount of cess and surcharge is not clearly given.
For the 2024-25 budget, the amount of cess collected for health and education is listed under various heads like corporate tax and income tax. GST compensation is given separately from cess. Additionally, the surcharge is listed separately. All these piecemeal details need to be compiled to calculate the total amount, which is not straightforward. Thus, it is challenging to determine how much revenue is in the divisible pool and how much is in the non-divisible pool.
The 15th Finance Commission has mandated that 41% of the total revenue should be shared with the states. However, this is not formally followed by the Union government. During the 14th Finance Commission, states were supposed to receive 42% of the total tax revenue, but only 41.5% was shared. The current 15th Finance Commission period mandates 41%, but available statistics show that only 40.1% has been shared with the states. Between 2009-10 and 2024-25, a total of Rs 2.1 lakh crores have been denied by the Union government. During the current 15th Finance Commission period alone, the highest amount of Rs 1.2 lakh crore has been withheld.
Including cess and surcharge, the amount deprived by the Union government, which is not paid to the states, amounts to lakhs of crores of rupees. Especially after the BJP came to power, unnecessary cess and surcharges have been collected from the people. In 2023-24, Rs 5,10,300 crore were collected as cess and surcharge, which is 14.8% of the total tax revenue.
Another malpractice by the Union government involves misusing cess and surcharge funds. The centre does not always spend the collected amounts for their intended purposes. Instead, it redirects them to other expenses. GST compensation cess is one such example. The Union government stopped giving GST compensation to the states in 2022 but has extended the GST compensation cess until 2026.
Federalism, as enshrined in the Constitution, is not only a political principle but also an economic one. Equitable sharing of funds between the Union and state governments is called fiscal federalism. A nine-judge bench of the Supreme Court, in Mineral Area Development Authority and Others v. Steel Authority of India on July 25, emphasised the importance of fiscal federalism. “In a federal system of government, its members, the states of the union, must freely perform the constitutional duties assigned to them. States are not vassals of the Union government.
The Supreme Court should protect the unique rights given to them,” the judges said in the verdict. They pointed out that the fundamental aspect of fiscal federalism is that states should have the financial resources to fulfil their constitutional obligations. Weakening the financial power of state governments prevents them from providing welfare assistance to the people.
The Modi government’s deprivation of funds to opposition-ruled states is not a punishment to the rulers of these states but a fiscal fraud, which is against the spirit of fiscal federalism.
Unnecessary cess
After the BJP came to power, unnecessary cess and surcharges have been collected from the people. In 2023-24, `5,10,300 crore were collected as cess and surcharge, which is 14.8% of the total tax revenue
Footnote is a weekly column that discusses issues relating to Tamil Nadu
(The writer is an MP from Villupuram and a member of Viduthalai Chiruthaigal Katchi)