To whom does the State really owe?

Year after year, the Budget season brings a familiar debate to the fore: whose resources are being spent on whom?

The question surfaces in multiple forms: Is the middle-class financing freebies and welfare schemes for poorer populations? Are southern states subsidising development in northern states? Should a greater share of revenues generated by the highest tax-paying cities be reinvested for their own development? The debates are often heated and highly politicised, shaped by competing narratives and agendas. At a more foundational level, however, these discussions invoke one question: to whom does the State owe the tax revenues it collects?

There are two ways of approaching the question. The first is to see taxation as a straightforward transaction between the taxpayer and the State. Here, taxes are the price we pay for public services — roads, buses, waste management, and maintenance of law and order. It emerges from the view that markets fail due to externalities and, therefore, require a State mechanism to fix the failures. This relationship resembles that of a customer and a service provider. Those who pay more expect more in return. If the middle-class contributes a larger share of taxes, public spending should reflect middle-class priorities. Taken to its conclusion, taxes collected in a city like Mumbai or Bengaluru should primarily be spent in that city.

An alternative perspective places taxation within a broader conception of citizenship. Here, the primary relationship is between the State and the citizen. Taxation is understood as a civic obligation that supports a shared political community. Citizenship is not contingent on one’s tax contribution; it reflects membership in a collective with reciprocal responsibilities. From this standpoint, the purpose
of tax revenue is to advance the well-being of society, including those who may contribute little or not at all. The State’s obligation is not to ensure individual returns on tax payments, but to act in public interest.

The constitutional and legal framework is aligned with this latter conception. The Constitution treats taxation as a legal obligation, not as a service contract. The articles governing taxation do not offer a guarantee of individual payoff. In fact, the Constitution directs the States to promote a social order based on justice, and minimise inequalities in income, status, facilities, and opportunities (Article 38, Directive Principles of State Policy). Article 39 explicitly directs the State policies to secure adequate livelihoods for all, ensure that ownership and control of material resources serve the common good, and prevent concentration of wealth and means of production to the common detriment. Therefore, it is not individual payoffs, but redistribution of resources that is a core constitutional mandate for India.

India’s system of fiscal federalism reflects this redistributive intent. Tax revenues collected by the Union and state governments are pooled into consolidated funds and allocated through the budgetary process in line with nationally determined priorities. There is no institutional mechanism that earmarks tax collections for specific priorities or mandates their return to the jurisdictions from which they originate. While demands for such arrangements have grown in recent years, adopting them would require a fundamental reconfiguration of the relationship between the Union and the states. The Finance Commission reinforces the redistributive principle by explicitly directing more resources to underperforming states, using criteria such as income distance to reduce regional inequalities.

Redistribution is also central to the constitutional commitment to social justice. Progressive taxation rests on the principle that those with greater economic capacity should contribute a larger share towards public resources. This is not a moral preference, but a structural requirement that seeks to reduce inequality. Despite this, India’s tax system has had limited redistributive impact, partly due to its heavy reliance on indirect and consumption taxes, which place a disproportionate burden on lower-income households, and a relatively weak emphasis on progressive income and wealth taxation.

There are many legitimate questions worth debating: How should redistribution be balanced against incentives for efficiency and good governance? How to ensure that tax collection inefficiency does not lead to the salaried class being disproportionately burdened compared to the wealthy and elite? How can public money be spent more effectively?

The idea that the taxation benefits must flow back to the people or places from which taxes originate misinterprets the basics of the constitutional relationship between the State and the people. It shifts the focus from citizens to taxpayers and, in doing so, weakens the constitutional promise of redistribution.

(The writer is Research Associate, Centre for Budget and Policy Studies)

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)