Tamil Nadu advocates for 50% share in the Central tax devolution

Tamil Nadu's Finance Minister advocates for a framework that incentivizes performance and a 50% share in Central tax devolution.

Tamil Nadu’s Finance Minister Thangam Thennarasu said on Thursday that the 16th Finance Commission must adopt a framework that incentivises performance. He also said it was imperative that States collectively advocate for a 50% share in the Central tax devolution. Delivering his speech at the Conclave of Finance Ministers on the 16th Finance Commission in Thiruvananthapuram in Kerala, he said every Finance Commission had an approach of redistribution to poorer States, but the intention was not attained. “But even with this approach, the desired levels of development in poorer States have not been achieved. It is an indication that the Commission must rethink its approach and adopt a framework that incentivises performance and fosters an environment where all States can thrive, rather than constraining the progress of those leading the way,” Mr. Thennarasu said in his speech, a copy of which was circulated to the media. Contending that the Finance Commissions had to strike a balance between equity and efficiency while deciding on the inter-se share of States, the Minister said, “However, an excessive emphasis on redistribution can not only skew incentives in favour of non-performance but can also deprive the fast-growing regions of critical development resources.” When the growth of the fast-growing regions was constrained by inadequate resources, “the whole nation, including the potential beneficiaries of redistribution, suffers”, Mr. Thennarasu argued. The Indian polity has an “inherent imbalance” in the distribution of powers and responsibilities between the Union and the States, he said. “While States are entrusted with the majority of responsibilities related to the development of society and the delivery of public services, including education, health, agriculture, and social welfare, the Union retains the majority of the powers of revenue generation,” he said. The successive Finance Commissions had tried to increase the distribution of net proceeds between the Centre and the States. However, “while 41% has been recommended by the 15th Finance Commission, the effective devolution has been only 31.42% of the gross tax revenue in the first four years of the award,” he pointed out. While effective devolution was less due to imposition of cess and surcharges, the counterpart funding of the Centrally sponsored schemes by the State governments had increased owing to the change in the sharing pattern, he said. He added that this had dealt a “double blow” to the States, reducing their ability to finance the existing and new State schemes in the sectors mandated by the Constitution. “It is imperative that the States collectively advocate for a 50% share in the Central tax devolution. We must urge the Commission to ensure that reliance on discretionary grants is reduced and predictable and objective resource transfers are increased. The Commission must devise a mechanism to restrict the use of cess and surcharges and recommend appropriate measures to protect the interests of States,” he said. Tamil Nadu had been “consistently penalised” by the successive Finance Commissions and its share in devolution had been reduced from 7.93% during the Ninth Finance Commission to a mere 4.07% during the 15th Finance Commission, he said. “This continuous reduction has caused a loss of ₹3.57 lakh crore to the State of Tamil Nadu, which is equal to 43% of our outstanding debt. This reduction has not only put a crumbling burden on the State finances but also reflects the lost opportunity for the State to achieve its full potential,” Mr. Thennarasu said.