A fair share: On the concerns of high performing States

Finance Ministers recently met in Thiruvananthapuram to advocate for increasing the divisible tax pool from 41% to 50%. This discussion is crucial given the current limitations on state revenues and the financial pressures from recent natural disasters.

Demands for Increased Tax Devolution

• Call for Higher Tax Share: The Finance Ministers are demanding a rise in the divisible pool of taxes from the Fifteenth Finance Commission’s recommended 41% to 50%. This increase aims to provide states with more financial autonomy.
• Concerns Over Cesses and Surcharges: They also seek a cap on cesses and surcharges collected by the Centre, which often fund specific projects but fall outside the standard devolution framework. This move aims to enhance transparency and fairness in revenue sharing.
• Backdrop of Budgetary Allocations: The urgency of these demands is underscored by inadequate allocations in the 2024-25 Union Budget for significant projects in states like Karnataka and Kerala, reflecting ongoing financial constraints.

Economic and Social Implications

• Impact on High-Performing States: States like Gujarat, Karnataka, Maharashtra, and Tamil Nadu, which contribute significantly to tax revenue, have seen reduced devolutions. This disparity hinders their ability to address specific developmental and climate-related needs effectively.
• Challenges from GST Framework: The GST framework limits states' autonomy in tax collection, exacerbating financial strains on high-performing states that require tailored capital and social investments for growth.
• Unaddressed Contingency Expenses: Neither the GST nor the Finance Commission has sufficiently accounted for contingency expenses, which are critical for managing extreme weather events and natural disasters affecting many states.

Need for Federal Reforms

• Urgent Call for Tax Devolution Reforms: Given India’s diverse social and economic landscape, there is a pressing need to amend the tax devolution framework. This would enhance state autonomy and promote a more participatory governance model.
• Federation and Governance Model: A reformed approach to tax devolution would facilitate a truly federal system, allowing states greater control over their financial resources to respond to unique regional challenges.
• Focus on Future Recommendations: With the Sixteenth Finance Commission’s recommendations expected by October 2025, there is an opportunity to advocate for frameworks that better accommodate the needs of various states and address ongoing financial challenges.

Practice Question

Q. Critically assess the implications of the current tax devolution framework on the financial autonomy of states in India and discuss potential reforms needed to enhance their governance and development capabilities.