Devolution discrimination debate: Siddaramaiah's claims vs Sitharaman’s rebuttal

On the same day as the Karnataka government launched a protest in the heart of Delhi, accusing the Centre of unfair treatment towards the state in tax devolutions and grants-in-aid over the past few years, Union Finance Minister Nirmala Sitharaman on February 7 termed these claims as "wrong and mischievous" in a point-by-point rebuttal.

"There are factual errors, false monetary claims, misleading statements, and selective mention of certain losses allegedly suffered without mentioning the gains that have accrued to the state in the 15th Finance Commission (FC) period," Sitharaman said in a note.

Karnataka's claim:
Chief Minister Siddaramaiah has claimed that the state has lost an estimated Rs 62,098 crore over five years in tax share from the divisible pool on account of the sharing pattern laid out by the 15th Finance Commission.

FM's response:
During the 14th Finance Commission's five-year award period (2015-16 to 2019-20) Karnataka received Rs 1,51,309 crore as tax devolution. However, in the first four years of the 15th finance panel's period (2021-22 to 2025-26), Karnataka would have already received Rs 1,29,854 crores by March 2024.

The Government of India has projected a further release of Rs 44,485 crore in the Interim Budget for FY 2024-25 taking the total to Rs 1,74,339 crore in five years. This is higher than the 14th FC period despite the precipitous drop in revenue during the Covid-19 period.

Sitharaman further said that in a bid to inflate its false claim of losses, the government of Karnataka has included shortfalls for the next two financial years namely 2024-25 and 2025-26.

"Its figures of actual tax revenue percentage shared with States have been presented without any calculation details and appear to be imagined. Even according to these baseless figures asserted by the government of Karnataka, the actual tax devolution percentage has increased since 2015-16, contradicting the claim of mistreatment by the Centre," she added.

Karnataka's claim:
The state has alleged that the Centre's increasing reliance on cess and surcharge has led to lower devolutions.

FM's response:
Karnataka's allegation around the Centre's increasing reliance on cesses and surcharges is misleading since it fails to mention that a large part of the cess collection comprises of GST Compensation Cess.

"This Cess does not belong to the Centre and goes entirely for the benefit of the states. For instance, out of a total of Rs 4.81 lakh crores of Cess and Surcharge collections in FY 2021-22, an amount of Rs 1,04,769 crores was towards compensation cess, which was released exclusively for the states," Sitharaman added.

Karnataka's claim:
According to the note shared by the finance minister, the state has allegedly claimed that Rs 1.65 lakh crore is due as GST compensation. Karnataka's chief minister has recently again raised the issue of how the stoppage of the GST compensation has hurt the state's tax collections.

FM's response:
Karnataka has ignored the fact that the compensation arrangement in Goods and Services Tax (GST) was for five years and the state is eligible to get compensation only for this five-year period.

Compensation to the States for GST is provided under the GST (Compensation to States) Act, 2017. As per this Act, compensation is payable for a five-year transition period starting from the GST implementation date which is July 1, 2017 and payable up to June 30, 2022.

Karnataka's claim:
Siddaramaiah said that the 15th Finance Commission had recommended a special grant of Rs 5,495 crore for the state in the interim report, and an additional Rs 6,000 crore in the final report for the development of water bodies and peripheral ring road. This recommendation has been allegedly rejected by the Centre, added Siddaramaiah.

FM's response:Karnataka has chosen to ignore the fact that it has received revenue deficit grant of Rs 1,631 crore recommended by the 15th FC. Similarly, Kerala, another southern state has received revenue deficit grants based on the recommendation of the 15th FC. However, other states such as Uttar Pradesh, Madhya Pradesh, Gujarat and Bihar did not receive any revenue deficit grant whatsoever – hardly a discrimination against any region or party in power.

"The selective reference on devolution and ignoring grants is mischievous and unfair to the non-partisan expert Constitutional body, that is, the Finance Commission," Sitharaman added.

The finance minister further said that the government of Karnataka has also chosen to ignore substantial additional funds provided by the Centre voluntarily beyond what is recommended by the finance commission. Under the scheme “Special Assistance to States for Capital Investment” that envisions 50-year interest-free loan, the southern state has been provided an amount of Rs 6,280 crore by the Government of India.

Karnataka has also received Rs 6,196 crore of central funding towards disaster relief during the 15th FC period so far, she said.