Opposition-ruled States asking for a higher share of taxes

Source: The post opposition-ruled States asking for a higher share of taxes has been created, based on the article “A fair share: Finance Commission must address the concerns of high-performing States” published in “The Hindu” on 19th September is 2024

UPSC Syllabus Topic: GS Paper 2- Polity- issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.

Context: The article discusses opposition-ruled States asking for a higher share of taxes from 41% to 50%. They also want limits on cesses and surcharges. It highlights how GST limits States’ tax autonomy, especially affecting industrialized regions needing specific developmental support.

For detailed information on Allocation of Funds between The Centre and States read this article here

What are the Demands of Opposition-Ruled States?

1. Increase in Tax Devolution: They demand a raise in the States’ share of the divisible tax pool from the current 41% (recommended by the Fifteenth Finance Commission) to 50%.
2. Limit on Cesses and Surcharges: They seek a cap on the Centre’s collection of cesses and surcharges, which are used for specific projects but fall outside the tax-sharing mechanism.
3. Funding for Key State Projects: States are concerned about insufficient allocations for crucial projects, such as Bengaluru’s Suburban Rail Project, Kerala’s Vizhinjam Port, and the second phase of the Chennai Metro.
4. Greater Flexibility for Handling Natural Disasters: States want more financial autonomy to address challenges like the flooding in Tamil Nadu, heavy rains in Gujarat, and the Wayanad landslide in Kerala.

How Has the Fifteenth Finance Commission Affected Wealthier States?

1. The Fifteenth Finance Commission allocates 45% weightage to State Gross Domestic Product differences, prioritizing poorer regions.
2. This reduces the funds for wealthier States like Gujarat, Karnataka, Maharashtra, and Tamil Nadu, which are major tax contributors.
3. These States require funds for capital and social expenditures tailored to their economic and industrial needs.
4. Limited devolution restricts these States from addressing their unique development, climate, and industrial challenges, hindering their economic progress.

Why Is There a Call for Change?

1. The current tax-sharing system, along with the GST framework, restricts States’ ability to raise their own funds.
2. High-performing States are struggling to meet their economic and social needs due to limited devolution.
3. Additionally, neither the GST nor the Finance Commission considers the cost of managing natural disasters.
4. Need for changes in the tax devolution system to give more power to the States and support truly federal governance.

Question for practice:

Examine how the demands of opposition-ruled States for increased tax devolution and limits on cesses and surcharges reflect their concerns about financial autonomy and regional development.