15th Finance Commission cuts Karnataka’s share in Central taxes

Published - February 09, 2020 12:02 am IST - Bengaluru

Karnataka is all set to see a sharp reduction in its share of Central taxes in the 2020-21 financial year. The 15th Finance Commission, in its interim report for 2020-21, has reduced the State’s share of the divisible pool of Central taxes by more than one percentage point.

Based on the criteria and weights adopted by the 15th Finance Commission, Karnataka’s share in Central taxes has been fixed at 3.646% for 2020-21. This is 1.07 percentage points lower than the share of 4.713% that was applicable during the 14th Finance Commission’s award period of 2016-20. This is expected to cause a severe decline in the State’s share in Central Tax Devolution (CTD), according to Aditi Nayar, principal economist at credit rating agency ICRA Ltd.

Before the 2019 Lok Sabha elections, in its interim budget, the Centre had set aside about ₹39,000 crore in CTD for Karnataka. But in the Union Budget presented after the election, Finance Minister Nirmala Sitharaman revised the estimate to ₹30,919 crore. This was lower than the ₹31,959 crore that the State received as CTD in 2018-19. In the budgetary estimate for 2020-21, the State’s share stands at ₹28,591 crore — a reduction of ₹3,368 crore from 2018-19.

Slowdown of the economy, below-target collection of GST, and reduction of corporate tax are the major reasons for the cut in allocation to the State.

The report, tabled in Parliament on February 1 by the Finance Minister, tweaked the criteria and weights under which funds are allocated to States, resulting in a sharp reduction in Karnataka’s share as the State was moving to the “upper middle income” category, sources in the government said. Citing a strong case for enhancing 1% of the divisible pool to meet the security and other special needs of the Union Territories of Jammu and Kashmir and Ladakh, the share of various States in vertical devolution has been reduced from 42% to 41%.

Up and down

Consequent to the FFC’s recommendations, the tax share of southern States such as Andhra Pradesh, Kerala, Tamil Nadu, Telangana, and Karnataka has come down, while that of Bihar, Madhya Pradesh, Punjab, Maharashtra and Gujarat has gone up.

The criteria of distance of per capita income is used by the FFC as an equity criterion in the devolution formula. This provides higher devolution to States with lower per capita income (and lower own tax capacity). The FFC stated that poorer States with low per capita income also have higher expenditure and need to be provided help for comparable services. “Hence, the income distance criterion helps in providing for two-sided equalisation,” the FFC stated.

Moreover, the FFC took into consideration the population in Census 2011. The States with lower per capita income are the more populous ons and, hence, get more funds.

State to write to Finance Commission

Top State government officials have expressed concern over Karnataka’s declining share in Central tax devolution. They have decided to write to the Finance Commission and the Union Finance Ministry seeking a higher allocation. Karnataka hopes that the commission, which is expected to submit its final report in October, will take into account its grievances, sources said.

Special grant not given

The 15th Finance Commission had recommended a special grant of ₹5,495 crore to Karnataka for 2020-21, so that the absolute Finance Commission-driven transfers (devolution and revenue deficit grants) in the year remain similar to 2019-20. However, the Centre rejected the proposal.

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