Centre's bid to cut states' tax share an 'attack' on federal structure: Karnataka CM Siddaramaiah

Bengaluru: Citing reports of the Centre seeking to cut states’ share of central taxes from 2026, Karnataka Chief Minister Siddaramaiah on Friday called it a "direct attack on the federal structure enshrined in the Constitution".

Asserting that the state government has the strength and resolve to counter such oppressive measures and that he strongly believes the people of Karnataka see this "injustice" for what it is, he said that if appeals and negotiations fail in this regard, his government will not hesitate to take to the streets and fight alongside the people.

"The Union Government’s attempt to further reduce Karnataka’s rightful share of tax revenue is not just anti-Karnataka but also a direct attack on the federal structure enshrined in the Constitution," Siddaramaiah said in a statement.

Noting that reports indicate that the NDA government is preparing to recommend reducing Karnataka’s tax share from 41 per cent to 40 per cent through the Finance Commission, he said, "Since Narendra Modi took office as Prime Minister, the Centre’s policies have consistently curtailed and weakened the constitutional rights of states." The Finance Commission, which is responsible for the fair distribution of tax revenue collected by states, is now being used as a tool to suppress states’ rights, he added.

"This is a dangerous trend, pushing states into a dependent position where they must rely on the Centre’s discretion—a move we cannot accept," he added.

Noting that decentralisation strengthens democracy while centralisation breeds "authoritarianism", Siddaramaiah said that as India marks eight decades of democracy, it is alarming that the union government is treating states as mere subordinates instead of empowering them.

"This is unacceptable," he added.

Every year, the Karnataka government remits approximately Rs 4 lakh crore collected from Kannadigas to the union government, he said.

"However, the state receives only 15 paise per rupee. Due to the 15th Finance Commission reducing Karnataka’s tax share from 4.713 per cent to 3.64 per cent, the state has lost Rs 68,775 crore over the past five years," he said.

Even though the 15th Finance Commission’s term ends next year, the Union Government has yet to release Rs 5,495 crore in special grants recommended by the Commission, along with an additional Rs 6,000 crore in centrally sponsored grants for Karnataka, he said.

Accusing the Union Government of consistently allocating Karnataka’s funds below the Commission’s recommendations, the CM said that in the financial years 2021-22, 2022-23, and 2023-24, grants for urban local bodies were reduced by Rs 1,311 crore, and Rs 775 crore was cut from Panchayat Raj institutions.

In 2022-23 and 2023-24, health grants were slashed by R 826 crore, and Rs 340 crore was cut under the State Disaster Response Fund (SDRF).

"In total, Rs 3,300 crore remains unpaid, and the special grants recommended for 2024-25 and 2025-26 must be released immediately," he added.

The Union Government is not sharing the revenue collected from cess and surcharges with the states, Siddaramaiah said. Since these levies are kept outside the tax pool, Karnataka has lost Rs 53,359 crore between 2017-18 and 2024-25.

The share of cess and surcharges in total taxes has increased from 8.1 per cent in 2010-11 to 14 per cent in 2024-25, further reducing Karnataka’s rightful tax share, he said.

"Additionally, central grants have been declining year after year. Given this situation, cess and surcharges must either be abolished immediately or included in the total tax pool and distributed fairly among the states," he added.

To compensate for revenue losses due to GST implementation, the GST compensation cess was introduced, Siddaramaiah noted.

"However, even though compensation payments stopped in July 2022, the Union Government continues to collect the cess until 2026. Instead of this, states should be allowed to levy additional State GST (SGST) to recover revenue losses," he added.

The service tax limit has remained unchanged since 1985, he said.

"Given the economic growth over the decades, a constitutional amendment is necessary to increase its upper limit. At least half of the taxes collected in the state must be returned to Karnataka. Additionally, the Constitution must be amended to include non-tax revenue in the divisible tax pool for fair allocation," he stated.

The Congress Government in Karnataka, through Guarantee Schemes and welfare programs, has earned the trust of the people, but the Union Government appears intent on discrediting it, Siddaramaiah claimed.

"To achieve this, it is denying Karnataka its rightful tax share and grants, pushing the state’s finances into crisis," he added.