North-South divide: Decoding unfair tax money devolution to southern states

The row over depriving southern states of their share picks up steam with Karnataka Congress leaders' protest

The issue of a North, South divide has surfaced again and this time over unfair devolution of tax money to the southern states, prompting Karnataka Congress leaders, including Chief Minister Siddaramaiah, to stage a protest in New Delhi on Wednesday.

While these states claim they were deprived of their legitimate share from central taxes, the tax share is decided based on recommendations from the Finance Commission concerned. The 13th Finance Commission gave recommendations for 2010-11 to 2014-15, the next for 2015-16 to 2019-20. The 15th Finance Commission gave recommendations for 2020-21 in its first report and then for 2021-2025-26.

If one looks at the devolution of central taxes to the five southern states – Andhra Pradesh, Telangana, Tamil Nadu, Karnataka and Kerala — their share did come down to 15.8 per cent during 2021-22-2024-25 each from around 18.62 per cent in 2014-15 which was the concluding year of the implementation of the 14th Finance Commission report and 18.04 per cent in 2015-16 which was the first year of the implementation of the 15th Finance Commission’s recommendations.

Fiscally stronger southern states nursed grievances when the terms of reference for the 15th Finance Commission asked it to base the population parameter on the 2011 census against the 1971 used by previous commissions. They alleged that this would go against them since they controlled their population better than many other states. To address these woes, the 15th Finance Commission also gave weight to demographic performance, which in layman’s language means population control.

Rajeev Gowda, the vice-chairman of the State Institute for Transformation of Karnataka, said he is not sure how much demographic management would have neutralised the population parameter, asserting that if one brings in the population parameter, the share of southern states is bound to shrink.

The 15th Finance Commission gave 15 per cent weight to the population parameter and 12.5 per cent to demographic performance while recommending the share of each state in central taxes. Share of Andhra Pradesh, Tamil Nadu and Kerala in total devolution of central taxes remained more or less the same in the 15th Finance Commission recommendations as compared to previous ones.

However, the share of Karnataka came down to 3.64 per cent from 4.71 per cent and Kerala to 1.92 per cent from 2.5 per cent over these periods.

There was also a recommendation of a revenue deficit grant for the states by the commission. This comes to Rs 30,497 crore in the case of Andhra Pradesh for 2021-22 to 2023-24, and Rs 1,631 crore for Karnataka for 2021-22. For Kerala, it was Rs 37,814 crore for 2021-22 to 2023-24 and Rs 22,04 crore for Tamil Nadu for 2021-22.