The top four states, Mumbai, Delhi, Tamil Nadu, and Gujarat, together generate 70% of the nation’s total direct tax revenue. Even among these four states, Mumbai accounts for one-third of the total amount collected. What if the citizens of Mumbai demanded that its money be invested just in Mumbai and that it be treated differently since it contributes more than even Maharashtra? Or maybe the citizens of Bengaluru argue that the city ought to be handled differently since it pays more taxes than the rest of Karnataka? What would happen if males in Karnataka objected to women receiving free bus trips just because men in the state pay more taxes than women?
Such matters were never considered by the country, but the Karnataka Congress administration just invented the new problem of the Center favoring southern states over northern ones when distributing funds.
The idea of “rich states paying for poor states” underpins the tax devolution requirement. The devolution formula is based on six factors, with income distance receiving the highest weight at 45%, followed by area at 15%, population of the state at 15%, demographic performance at 12.5%, forest and ecology at 10%, and tax and fiscal efforts at 2.5%.
The 14th Finance Commission said that Karnataka used to get Rs 4.713 out of every Rs 100. Nevertheless, the 14th and 15th Finance Commissions corrected the figures to Rs 3.646 and Rs 3.647, respectively, noting that Karnataka’s overall performance had improved. The claim that the BJP is perpetrating “anyaay” (injustice) needs to be immediately discarded. Karnataka received Rs 61,691 crore under the 13th Finance Commission (2010-2014), Rs 1,51,309 crore under the 14th FC (2015-2019), Rs 1,29,854 crore (already in the last four years) under the 15th FC (2020-2026), and at the end of the fifth year, this amount will reach Rs 1,74,339 crore.
Regarding the grants that Karnataka received from the Center, during the UPA administration (2004–2014), the state received a mere Rs 60,780 crore; in contrast, during the last ten years (until January 2024) under the NDA government, the state received Rs 2,08,832 crore, representing a roughly 243% increase. In addition to all of this, Karnataka would get extra grants-in-aid totaling Rs 18,005 crore till March 31, 2024. Additionally, a 50-year loan of Rs 6,280 crore with no interest was given to Karnataka.
A committee chaired by RBI Governor Raghuram Rajan was established by the UPA administration in 2013 with the recommendation to include the backwardness index into the process of allocating funding to the states. The UPA administration determined that the poorest states would automatically get 60% of the Central money. According to data, Karnataka’s fund share decreased from 4.39 percent to 3.73 percent using the same fund allocation mechanism. The allocation was somewhat random as the population of the state and its surrounding region received the highest weights in the same algorithm.
The distribution of finances also became a contentious political issue in 2013, when Nitish Kumar asked the UPA to designate Bihar as a “special category state” in order to increase funding, with the understanding that he would back the UPA in both the Lok Sabha and Bihar elections. But once Rajan’s revised formula was implemented, Bihar’s designation as a “special category state” was revoked and given to seven states in the Northeast, including Sikkim, Uttarakhand, Jammu & Kashmir, and Himachal Pradesh.
States get funding from the Center for Development, but if they implement “freebies” under the guise of “development” and then complain about not having enough money, the Finance Ministry will take notice. All state administrations offering incentives in exchange for improved performance in the next elections—whether it be Punjab, Tamil Nadu, Kerala, Himachal Pradesh, or Karnataka—have a similar pattern of pleading for funding. The days of using caste or language to divide the country are long gone. Thus, let’s put an end to the “tax-dividing nation” argument once and for all.