Karnataka CM seeks higher share in central tax pool

Hindustan Times

14-06-2025

Karnataka chief minister Siddaramaiah on Friday pushed for a more equitable tax devolution system while urging the 16th Finance Commission to rectify what he described as a persistent imbalance in fiscal transfers from the Centre to states.
'Karnataka's fiscal strength fuels national growth. It is time to ensure that growth is not penalised but rewarded. We urge the commission to adopt a balanced, forward-looking approach to devolution,' Siddaramaiah said during a meeting with commission chairman Arvind Panagariya and members in New Delhi to present Karnataka's views through an additional memorandum.
Highlighting Karnataka's contribution to the national economy, the chief minister pointed out that the state accounts for nearly 8.7% of India's GDP, despite representing only 5% of the country's population. It also ranks second in GST collections. 'For every rupee Karnataka contributes to Union taxes, it receives only 15 paise in return,' he pointed out.
Citing the reduction in the state's share of tax devolution by the 15th Finance Commission — from 4.713% to 3.647%, the CM said that it resulted in a cumulative loss of over ₹80,000 crore. Karnataka's per capita devolution, he added, has fallen from 95% of the national average during the 14th Finance Commission to just 73% under the 15th, even as the state's GDP contribution rose.
The 16th Finance Commission, established in December 2023, is tasked with recommending tax revenue distribution between the central government and states for 2026-31. The commission is currently conducting consultations and must submit its recommendations by October 31, 2025.
Siddaramaiah was joined by economic advisor Basavaraja Rayareddy, the chief secretary, and senior officers from the finance department and the chief minister's office.
In its main memorandum, Karnataka proposed increasing the states' share in vertical tax devolution to at least 50% and capping cesses and surcharges at 5%. It also recommended that Union non-tax revenues be included in the divisible pool. For horizontal devolution among states, Karnataka argued that high-performing states should retain about 60% of their contribution, with the remaining 40% directed toward less-developed states.
The state also advocated reducing the weight assigned to the income-distance criterion — a metric used to determine fiscal capacity gaps — and shifting focus towards measuring each state's economic contribution. 'Equity must be implemented in a time-bound and outcome-oriented manner, without disadvantaging states that demonstrate strong economic performance and sound fiscal management,' Siddaramaiah said.
The additional memorandum focused on three key areas — disparities in per capita devolution, flaws in the design of Revenue Deficit Grants, and the unpredictability of State-Specific Grants.
The CM questioned the effectiveness of Revenue Deficit Grants, pointing out that 'persistent deficits in beneficiary states' raise doubts about their impact. He called for these grants to be distributed using the horizontal devolution formula instead.
He also criticised the current assumptions used in determining these grants. 'Unfortunately, these assessments tend to place welfare policies on a lower pedestal compared to salaries, pensions, and administrative expenses,' he said. Referring to the state's welfare programs, Siddaramaiah said, 'Our government has been guided by Gandhiji's philosophy of Sarvodaya, emphasising welfare for all. These initiatives stimulate local demand and drive inclusive growth.'
In place of discretionary grants, Karnataka proposed a formula-based allocation of 0.3% of Gross Union Receipts. However, if special grants are retained, the state reiterated its demand for support for Bengaluru and other critical projects.
Seeking backing for ₹1.15 lakh crore in investments to upgrade Bengaluru's infrastructure, the CM said the capital city plays a central role in the state's economy. He also emphasized the need to address the regional imbalances in Kalyana Karnataka and Malnad, which continue to face poor infrastructure and low income levels.
Concluding the presentation, Siddaramaiah asserted that equity and growth must go hand in hand. 'A strong Karnataka — supported by fair fiscal devolution — is essential for a strong India,' he told the commission.