5-year jolt for Karnataka as state set to be biggest loser in tax share under 15th Finance Commission

Karnataka will be the biggest loser in percentage terms of the tax share devolved under the 15th Finance Commission, which determines how tax revenues are distributed between the Centre and the states.

The state's share has depleted by 23%, from 4.713% of the total divisible pool in the 14th Commission to 3.646% now, an assessment of the 15th Commission's report by DH shows. 

In effect, Karnataka will receive just about Rs 40 for every Rs 100 generated as tax revenue from the Centre as per the Commission’s new formula. This is down from Rs 53 per Rs 100 the state got under the 14th Commission.

Though Maharashtra will receive Rs 32 for every 100 generated as tax revenues, Karnataka loses more in percentage terms. Even the special grants allotted to the state, experts say, will not be adequate to cover the devolution deficit.

The Commission's new formula has been criticised by the southern states over the terms of reference (ToR) as it puts them at a disadvantage.

While Karnataka will lose a huge chunk of revenue, states like Rajasthan and Gujarat gain the most. 

Other big gainers under the new formula include Uttar Pradesh, which will receive around Rs 256 for every Rs 100 contributed as tax revenue, while Bihar will receive more than Rs 298 for every Rs 100 contributed.

While these two large states, apart from Northeastern states, will be the biggest beneficiaries, Maharashtra, which will get Rs 32, and Karnataka will lose out in a big way.

The situation will persist for the duration of the 15th Commission starting from April 1, 2020 to March 31, 2025.

Data also shows that amount of tax devolved to Karnataka decreased from Rs 39,806 crore (2019-20 budget estimate) to Rs 38,134 crore (2019-20 revised estimate), as the Centre failed to shore up the required tax revenue.

Following the decline in devolved taxes as per the new agreement, the budget estimate for Karnataka’s share this year is Rs 28,591 crore, which is Rs 11,215 crore less than the previous budget estimate.

As if aware of this, the Commission has said: “We believe that during 2020-21 no State should, as a result of our recommendation, get, in absolute terms, less than the total amount of devolution and revenue deficit grants estimated to be received in 2019-20.”

So, the Commission has recommended providing Rs 6,764 crore for three states of which Rs 5,495 crore will be Karnataka’s. However, this will be inadequate to meet the shortfall caused by devolution based on the new formula.

Economist R S Deshpande blamed the state government for the massive decline in funds allocated.

“The fault lies in the memorandum submitted by the state to the Commission. Karnataka, like a few other states, could have gained if the memorandum was based on the new devolution formula of the Commission,” he pointed out.

On special grants sanctioned to Karnataka, Deshpande said the funds will not be enough. “Moreover, it is not a fungible grant and can only be used for the purpose it is released for,” he said.