Cash News
Kerala chief minister Pinarayi Vijayan said on Thursday that the 16th Finance Commission should factor in the rising trend in surcharges and cesses levied by the Union government and suggested that states should receive 50% from tax devolution – higher than the 41% recommended by the 15th Finance Commission.
Vijayan’s comments came while inaugurating a conclave of finance ministers from five non-Bharatiya Janata Party (BJP) ruled states — Karnataka, Tamil Nadu, Punjab and Telangana — hosted by Kerala to discuss issues related to the 16th Finance Commission, a constitutional body set up every five years to decide on the share of central taxes between the Centre and the states.
The finance ministers of these participating states agreed with Vijayan that states need to receive more funds from the Centre.
Vijayan said that, as per Article 270 of the Constitution, surcharges and cesses are excluded from the divisible pool of taxes shareable with the states and suggested that they should be part of total tax collected by the Centre so that it can be part of the devolution formula.
“In the last decade, the surcharges and cesses have shown a rising trend and now comprise around one-fifth of the gross tax revenue of the union. Its direct consequence is the shrinkage of the divisible pool of the taxes,” Vijayan said.
Kerala, he underlined, had demanded from the 15th Finance Commission that the preceding share of taxes to be distributed to the state need to be raised to 50% of the net proceeds considering the “persisting vertical fiscal imbalance” between taxing powers and expenditure obligations of the Centre and the states.
The 15th Finance Commission had recommended 41% of the tax funds collected by states to be paid to the states, one percentage point less from the recommendation of 14th Finance Commission. Currently, the 16th Finance Commission is visiting states to seek suggestions on devolution of funds and is expected to submit its report to the central government by early 2025.
CM Vijayan, whose administration went to the Supreme Court in December last year claiming that the Centre was limiting its borrowing capacity, argued that states like Kerala which have taken extra efforts to improve health, education and demographic indicators must not face falling tax share.
“Our share in taxes has fallen from 3.05% in the 11th Finance Commission to 1.92% in the 15th Finance Commission,” the chief minister said.
Telangana finance minister Bhatti Vikramarka said, “The Centre’s growing reliance on cesses and surcharges not shared with states has soared to over 28% of the Centre’s gross tax revenue. This significantly diminishes the resources available to states.”
To be sure, the concerns of southern states and those with higher per capita incomes having to sacrifice their share in central taxes because of the equity and population weightage principle aren’t being aired for the first time. The 15th Finance Commission, which was chaired by NK Singh, had to take these into account.
In an interview to HT in 2021, Singh acknowledged the complexity of the issue, stating, “Adequacy is a subjective norm. The best way this [concerns of southern states] would have been addressed is a situation would have been addressed is a situation where we hadn’t used population as a criteria at all. But then I explained you would have had other kind of choices.”
He elaborated on the commission’s approach: “Instead of saying ‘adequately addressed’, let me say ‘reasonably mitigated’, or ‘responsibly mitigated’”.
Singh highlighted the commission’s efforts to balance these concerns: “You could say that we have tried to in some ways redress this in a manner we considered appropriate. In spite of what we did as we had done, to mitigate this, it turned out to be that many of the states would have had a huge yawning resource deficit.”
Krishna Byre Gowda, Karnataka revenue minister, said: “What we are seeking here is a quest for justice because we are those who contribute enormously to the cause of the union through creation of jobs and opportunities.”
Punjab finace minister Harpal Singh Cheema said that while the introduction of GST was a landmark reform, it has limited the fiscal autonomy of the states.
The conclave, presided over by Kerala finance minister KN Balagopal, was attended by finance ministers and top officials from the participating states.