Tax allocation reignites fiscal federalism war; Karnataka may resume stir

The recent release of funds in tax devolution to the states by the Centre has reignited the fiscal-federalism conflict between Karnataka and the Centre over the perceived unfairness.

The NDA government at the Centre has released Rs.1.78 trillion, including an advance installment of Rs 89,086 crore, to enable states to accelerate capital spending and finance their development and welfare-related expenditure during the festive season, especially Dasara.

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Allocation bias

The discrimination in allocation to southern states, compared to the north, seems quite glaring, with Uttar Pradesh alone getting more than what all the five southern states together received in the advance instalment.

According to a statement from the Finance Ministry, Uttar Pradesh received Rs 31,962 crore, followed by Bihar (Rs 17,921 crore), Madhya Pradesh, (13,987 crore), West Bengal (Rs 13,404 crore), Maharashtra (11,255 crore), Rajasthan (Rs 10,737 crore), Odisha (Rs 8,068 crore), Tamil Nadu (Rs.7,268 crore), Andhra Pradesh (Rs 7,211 crore), Karnataka (Rs 6,498 crore) and Gujarat (Rs 6,197 crore).

Also read: Central tax devolution: UP gets more than South states combined

The BJP-ruled Uttar Pradesh, Madhya Pradesh, Rajasthan, and Odisha, and the BJP-supported governments in Bihar, Maharashtra, and Andhra Pradesh have received more funds compared to non-BJP states, including Telangana and Karnataka. The only exception is the BJP-ruled Gujarat, which has got less funds than Karnataka.

Re-launch of protest

Protesting against the perceived discrimination, the Karnataka government has threatened to relaunch its “My State My Tax” protest against the Centre over fiscal federalism.

The “My State My Tax” protest, launched by the state’s Congress government in February 2024, in the run-up to the Lok Sabha polls, was something unique in Indian political history. Accusing the Centre of choking fund flow after a crushing drought, Chief Minister Siddaramaiah, Deputy Chief Minister DK Shivakumar and many senior Cabinet ministers went to Delhi and sat on a protest. They had been joined by ministers and leaders from other southern states of Kerala, Tamil Nadu, and Telangana too.

“It was an extraordinary development, where democratically elected heads of Indian states were forced to go to Delhi to demand their share of tax revenues and taxation rights,” said HK Patil, Karnataka’s Minister for Law and Parliamentary Affairs, reacting to the skewed allocation by the Centre. He hinted that the Karnataka government may re-launch the “My State My Tax” protest.

Also read: Kerala: Declining local body grants may fuel further debate on fiscal federalism

Karnataka MPs’ silence

Deputy Chief Minister DK Shivakumar criticized the Centre for unfair tax devolution to Karnataka, promising to launch the “My State My Tax” protest again. He questioned why the BJP and JD(S) MPs from the state were “strategically” maintaining their silence.

“I don’t know why the BJP and JD(S) MPs representing Karnataka in Parliament — some of whom are top ministers in Narendra Modi’s Cabinet — are silent about the great injustice being done to Karnataka, which is paying more tax to the Union government’s exchequer,” said Shivakumar, dubbing their behaviour as “shameful”.

“It is a continuation of the injustice to Karnataka. The Centre has allocated more to Uttar Pradesh and Bihar. Karnataka has been given less than Andhra Pradesh, which doesn’t contribute much in terms of tax. We will not keep quiet. We will fight and protest against this injustice. We will launch a protest on the model of “My State My Tax”, which we had done earlier,” he said.

Karnataka’s demand

Shivakumar rejected the Centre’s population-based allocation theory for tax devolution. Chief Minister Siddaramaiah had earlier argued that under the 16th Finance Commission, “Karnataka should retain 60 per cent of its contribution to the divisible tax pool” while sending a strong message to the Centre that “supporting poor states should not come at the expense of Kannadigas”.

Siddaramaiah is raising the issue of the devolution of taxes at a time when Karnataka is set to celebrate the 68th Kannada Rajyotsava on November 1.

Also read: Siddaramaiah attacks Centre on 'unfair devolution of taxes'; invites 8 CMs for conclave

Meanwhile, bitterly criticizing the Centre’s “discrimination” against Karnataka, Basavaraja Rayaraddi, Economic Adviser to Chief Minister Siddaramaiah, said the Congress government in the state is in favour of forming an “economic alliance” with “growth-oriented states”. Karnataka has decided to host a conclave to deliberate on issues related to securing a fair share in the devolution of taxes.