Karnataka, which is readying it’s response to the 16th Finance Commission, formed recently, is set to seek sharing of cess and surcharge collected by the Centre with the States and urge the Union government to consider losses suffered by the States due to implementation of GST. Karnataka will also urge the Centre to seek the opinion of States before framing terms of reference for the commission and also in appointment of members to it.
“Karnataka will seek inclusion of cess and surcharge for the purpose of calculation for devolution of funds to the States and demand will be made that Centre should share the cess/surcharge with States. Currently, the Centre is sharing less than 5% of the total cess/surcharge collected with the States,” Revenue Minister Krishna Byre Gowda told presspersons after the State Cabinet meeting.
He said that since the last Finance Commission did not have any members from Southern States, Karnataka will seek appointment of members after consulting the States so that the needs of the States are reflected well. “The Centre consulting with States in framing terms of reference and appointment of members will build trust between the States and the Centre in the federal structure,” he said. The Centre will also be urged to increase the grants given for natural disaster management, the Minister added.
Population control
The Minister also said that the 16th Finance Commission will be urged to consider the weightage for controlling population since the previous commission had given no incentive for such measure. “The Centre considers IT income of the State in calculating per capita income of the State though the State does not get tax revenue out of it. However, there are serious imbalances, which we will appeal to be considered. We will also ask for incentive for maintaining fiscal discipline. The previous commission had provided no incentive for fiscal management as those States that had violated norms had been incentivised through revenue deficit grants,” Mr. Gowda said.
The Cabinet also decided to set up a technical cell with former finance commission member Govind Rao, former IAS officer M.R. Srinivas Murthy and Narendra Pani to advice the State in the issue, he added.
Annual losses to State
Mr. Gowda said that while it is estimated that Karnataka contributes about ₹4 lakh crore annually in terms of taxes and cess, it receives just about ₹70,000 crore, including devolution of taxes and grants. “It means Karnataka receives about ₹12 for ₹100 collected as taxes collected from here. Karnataka contributes in a big way to nation development as it also contributes for about ₹3.5 lakh crore through IT exports earning precious foreign exchange,” he said.
He, however, said that Karnataka has been losing about ₹14,000 crore annually as devolution has been reduced from 4.71% in 14th Finance Commission to 3.64% in 15th Finance Commission. “In all, between 2020 and 2026, Karnataka will lose about ₹62,000 crore. The increase in cess/surcharge by reducing tax rate has also affected the States since the Centre does not share cess with States.”
Stating that the total receipts of the Centre through surcharge/cess has increased from 8%-9% in the past to 23% now, Mr. Gowda said: “Karnataka is losing about ₹8,200 crore annually due to non-sharing of cess. For example, though about ₹30,000 crore to ₹40,000 crore is collected from cess on petrol and diesel in Karnataka, State does not get more than ₹1,000 crore annually.”
Similarly, he said that due to GST implementation, Karnataka is losing about ₹25,000 crore annually due to shortfall while the the compensation to States came to an end in 2022. “The Centre is yet to release ₹11,495 crore recommended as three special grants by 15th Finance Commission,” the Minister said.
