The Ministry of Finance has released a tax devolution of Rs. 1,78,173 Crore to the states on, the 10th of October instead of the usual monthly devolution of Rs. 89,086.50 Crore, which was due in October 2024. The advanced instalment was released to accelerate capital spending and finance development and welfare-related expenditures.

Uttar Pradesh received the biggest share of Rs 31,962 Crore, followed by Bihar at Rs 17,921 Crore, Madhya Pradesh at Rs 13,987 Crore, and West Bengal at Rs 13,404 Crore. Goa, Sikkim, and Mizoram are among the bottom three with respective shares of Rs 688 Crore, Rs 691 Crore, and Rs 891 Crore. Following the devolution, a north-south row was eminent, with opposition leaders accusing the centre of ‘injustice’ to the state.

Issues with Tax Devolution

"Uttar Pradesh, infamous for its poor governance, has been allocated ₹31,962 crore; Bihar, ₹17,921 crore; Madhya Pradesh, ₹13,987 crore; and Rajasthan, ₹10,737 crore. Why should the sweat and toil of Karnataka fuel the growth of states that have lagged due to maladministration?” Karnataka CM Siddaramaiah said in a statement on Saturday. He added that Karnataka had incurred a loss of Rs.60,000 crore in tax devolution in five years.

Uttar Pradesh, with 16% population of India received approximately 18% of the share while southern states such as Tamil Nadu, Karnataka, Kerala, Andhra Pradesh, and Telangana combined received approximately 16% of the share with 20% of the population of India.

For the FY 2022-23, Maharashtra recorded the highest direct tax contribution with Rs. 3,84,258.21 crore, followed by Delhi's Rs.1,49,613.12 Crore and Karnataka's Rs.1,08,973.15 Crore. Similarly in GST collection Maharashtra in 2022-23 recorded the highest with Rs. 1,29,129 Crore, followed by Uttar Pradesh, Karnataka, Tamil Nadu and Gujarat respectively at Rs. 66,052 Crore, Rs. 65,579 Crore, Rs. 58,194 Crore, Rs. 58,009 Crore.

Direct tax contributes approximately 36% of the revenue in the Union Budget. Out of every Rs.100 paid in tax, Maharashtra gets back Rs.8 UP gets Rs.333 and Bihar gets Rs.922.

Methods of Tax Devolution

Article 270 of the Constitution shares the schemes for the distribution of Tax between the Central and State Governments. As recommended by the 15^th Financial Commission, corporation tax, personal income tax, Central GST, the Centre’s share of the Integrated Goods and Services Tax (IGST) etc are shared from the divisible pools. States account for 41% of the vertical devolution while the centre gets the residual 59%. The horizontal devolution between the states depends on the following criteria, 45% weightage to Income Distance, 15% to Population, 15% to Area, 10% to Forest and Ecology, 12.5% to Demographic Performance and 2.5% to Fiscal and Tax effort.

Income distance is the distance of the State’s per capita income from the State with the Highest per capita income. The population is the population as per the 2011 census. Forest and Ecology considers the share of the dense forest of each state to the aggregate of all states. Demographic performance refers to the efforts to control population growth and Tax effort refers to the tax collection efficiency.

Changes in the Method of Calculation

The first seven commissions assigned 80-90% weightage to the population. The eighth pay commission gave prominence to equity. This commission assigned 22.5 per cent to the inverse of the per capita income of States and 45 per cent weightage to the distance of the per capita income of a State from the highest per capita income while reducing the weightage to population from 90 per cent to 22.5 per cent and retaining the weightage to contribution at 10 per cent. The Tenth Commission introduced weightage to the fiscal and tax efforts for the first time. The recommendation of the eleventh commission to reduce the weightage given to the population to 10% and to assign a weightage of 62.5% to per capita income resulted in the reduction of shares of high-income and middle-income states respectively. The Twelfth Commission reduced the distance of per capita income from 62.5 to 50 and increased the weightage of the population.

The Way Ahead

Some reforms have been proposed to the Financial Commission’s method of Horizontal Devolution. Congress Chief Mallikarjun Kharge has said "From our government side Chief minister said on it and our government will fight for it. Many states in south India are not getting their share. CM Siddaramaiah has also argued about it. We will raise this issue in Parliament,"
The divisible pool of taxes does not include cess and surcharges. There has been growing criticism about the reduced fiscal autonomy of the southern state, even after a major contribution to the fiscal revenue. The North-south divide worsens due to the tax devolution. This has been a contention between the state and the centre for a long time. Arguments to include a portion of the cess and surcharges to increase the divisible pool have been heard in some corners. Whereas, the southern states demanded a greater weightage to efficiency.