States must raise tax devolution concerns with Finance Commission: FM

With southern states voicing concerns over 'unfair' tax money devolution, Finance Minister Nirmala Sitharaman has said the states have to engage and highlight their concerns with the 16th Finance Commission, whose recommendations will decide how the funds are divided.

Population is one of the criteria used by Finance Commissions to decide how the tax revenues are divided. Southern states, which have managed to check the rise in population, feel they get a raw deal when compared to the northern states with much larger population growth.

In an interview with PTI, Sitharaman said the central government does not decide on the devolution formula. The devolution of taxes is made in accordance with the recommendations of the Finance Commission and the aggrieved southern states should approach the panel for change in parameters.

"It is for the states to engage with the Finance Commission to express their concerns about the parameters based on which the tax devolution principles are laid down by them.

"And if they think over a decade, they've had a distinctly different paradigm happening there. It is for them to highlight those issues to the Finance Commission," she said.

After all, she said, the Centre takes the Finance Commission's recommendations, particularly on the core suggestions, and follows them. 

It is not appropriate for them to voice concerns as the central government does not decide devolution of taxes, she added.

The Finance Commission typically gives recommendations for the division of tax revenues for five years. The 13th Finance Commission gave recommendations for 2010-11 to 2014-15 and its successor recommended formula for 2015-16 to 2019-20. The 15th Finance Commission gave suggestions for 2020-21 in its first report and then for 2021-2025-26.

Five southern states -- Andhra Pradesh, Telangana, Tamil Nadu, Karnataka and Kerala -- saw their share 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.

The 16th Finance Commission, headed by Arvind Panagariya, has been tasked to make its recommendations available by October 31, 2025, covering an award period of 5 years.

Its predecessor had suggested that states be given 41 per cent of the Centre's net tax receipts against 42 per cent for 2015-16 to 2019-20. The 14th Finance Commission had increased the share of states from 32 per cent to 42 per cent.

The 15th Finance Commission had used the 2011 census for deciding on the weightage of population against the 1971 census used by previous commissions.

On whether it is appropriate for certain states to ask their residents to have more children, Sitharaman said, "I am not even commenting on it because whatever their point of view is should be communicated to the Finance Commission".

"It is for them to highlight to the Finance Commission whatever the principle be, or whatever the factor be," she said.