Context: The Finance Ministers of five opposition-ruled states have raised concerns regarding the 15th Finance Commission’s recommendation, which allocates 41% of taxes to the states. These ministers are calling for an increase to 50%, along with capping the central government’s cesses and surcharges, which further limit states’ ability to collect taxes. This discussion comes at a crucial time when several states, particularly high-performing ones like Karnataka, Maharashtra, and Tamil Nadu, are feeling the pinch of restricted tax collections under the GST framework.
Relevance: General Studies (GS) Paper II (Polity and Governance)
Mains Question: Discuss the challenges faced by high-performing states under the current tax devolution framework. How can the Finance Commission address these concerns to promote a more equitable fiscal relationship between the Centre and States?
- Current Tax Devolution Framework:
- The 15th Finance Commission recommended that 41% of central taxes be devolved to states. However, high-performing states argue that this is insufficient, given their economic contributions and developmental needs.
- States like Gujarat, Karnataka, Maharashtra, and Tamil Nadu contribute significantly to India’s GDP and tax revenues, but receive lower per capita allocations, leading to fiscal strain.
- Impact of Cesses and Surcharges:
- Cesses and surcharges, levied by the central government, are not part of the divisible tax pool. This means that states receive no share of these revenues, even though they contribute to the overall tax burden on citizens.
- Opposition states argue that cesses have increased dramatically over the years, further reducing their ability to manage local finances and developmental projects.
- Challenges with GST and Central Schemes:
- Since the introduction of the GST, states have lost much of their autonomy to collect taxes. High-performing states, in particular, have felt this more acutely, as their tax revenues are now limited by the uniform tax structure.
- States like Kerala and Tamil Nadu have expressed frustration over inadequate allocations for central projects, such as Bengaluru’s Suburban Rail Project and Kerala’s Vizhinjam Port. These projects are critical for regional development, but they have received insufficient funding under the current central schemes.
- Environmental and Developmental Needs:
- Climate-related disasters, such as flooding in Tamil Nadu and landslides in Kerala, highlight the need for greater fiscal flexibility for states. The current framework does not provide adequate funds for contingency planning and disaster mitigation, which are becoming more pressing due to climate change.
- High-performing states require tailor-made policies that address their unique industrial, social, and environmental needs. The Finance Commission must ensure that states are not penalized for better economic performance, but instead supported in maintaining their growth.
- Suggestions for Reform:
- The 16th Finance Commission, whose recommendations are due by October 2025, must take a more equitable approach to tax devolution. States are asking for an increase in the divisible pool to 50%, as well as a cap on cesses and surcharges to ensure that all taxes are shared fairly between the Centre and the states.
- There is also a need for greater fiscal autonomy for states, allowing them to design and implement policies suited to their specific developmental needs, especially in areas like infrastructure and disaster management.
Additional Data:
- 41% of central taxes currently devolved to states.
- High-performing states like Karnataka and Tamil Nadu have seen reduced tax collections under the GST framework.
Conclusion:
The current tax devolution framework under the 15th Finance Commission has created challenges for high-performing states, which are unable to meet their growing developmental and fiscal needs. The 16th Finance Commission has an opportunity to rectify this imbalance by increasing the share of taxes devolved to states, capping cesses and surcharges, and providing greater autonomy in fiscal matters. A truly federal and participative fiscal structure will ensure that all states, regardless of their economic standing, can thrive and contribute to India’s overall growth.
